Accounting of a dropshipping business in Bulgaria

In today's dynamic economic environment, dropshipping has become a popular model for starting and developing an online business. This model offers numerous advantages, such as reduced start-up costs, a wide range of products without the need for their physical possession, and the ability to scale quickly. Despite these advantages, dropshipping businesses in Bulgaria face specific accounting and tax challenges that require careful attention and a professional approach.

Our goal is to provide you with a complete and in-depth guide to the accounting of dropshipping business in Bulgaria, covering all the aspects you need to know for the successful management of finances and taxes of your dropshipping operation. We cover key topics such as tax deductions, VAT, required documents to declare, specifics of dropshipping contracts, as well as the management of reports and invoices from platforms such as Amazon, Ebay, Shopify, CJDropshipping, Spocket and others.

In addition, we will address the frequently asked questions of dropshipping merchants, providing answers and solutions based on our many years of experience and deep knowledge in the field of accounting and taxation. Accounting services for dropshipping merchants, whether individuals or legal entities, require a specialized approach that takes into account the uniqueness of the dropshipping model.

Covering these topics, our mission is to provide you with the comprehensive information and knowledge you need for the successful accounting management of your dropshipping business. At Elan Consulting, we understand the complexity and challenges that the dropshipping model presents, and we are here to support you every step of the way to success. Contact us for a consultation and take advantage of our specialized accounting services adapted to the needs of dropshipping merchants.

What is dropshipping business model in Bulgaria and around the world?

Dropshipping is a business model that allows entrepreneurs to start an online store without holding inventory. Instead, when a dropshipping store sells a product, it buys the item from a third party and ships it directly to the customer. Thus, the seller does not have to deal with the direct management of the goods.

Advantages and disadvantages

Advantages:

• Low start-up costs:You don't have to invest in stock.
• Flexibility:You can easily test different market niches without significant upfront costs.
• Easy Scaling:Expanding the product range and increasing orders does not require additional warehouse and logistics costs.

Disadvantages:

• Low profit margins:High competition leads to a decrease in profits.
• Control of supplies:Sellers have limited control over the execution and delivery of orders.
• Quality of products:Difficulties in ensuring the quality of products from third parties.

Specifics of dropshipping in Bulgaria

In Bulgaria, as in many other countries, the dropshipping business model attracts entrepreneurs due to low barriers to entry and opportunities to quickly start online trading.

Bulgaria is a particularly attractive destination for registration of a dropshipping company in view of the low initial capital for opening a limited liability company of only 2 leva!

It is important to note that the implementation of this model requires careful planning, especially with regard to tax and accounting regulation, to ensure compliance with local laws and regulations.

Global trends in dropshipping operations

Globally, dropshipping continues to be a popular business model, thanks to growing online consumption and the development of e-commerce. Supply chain management technologies and integration with major platforms such as Amazon, eBay, Shopify and others make it easier for entrepreneurs in building successful dropshipping businesses.

The dropshipping model offers opportunities for rapid market entry and scaling, but it also requires a thorough understanding of market trends, consumer behavior, and accounting and tax regulations. In Bulgaria, as well as internationally, success in this business often depends on the ability to offer quality products, competitive prices and excellent customer service.

VAT, taxation and declaration in dropshipping business

Taxation, VAT charging and declaration in the context of dropshipping business in Bulgariarepresents an important component of the financial management of this type of commercial activity. It requires a detailed understanding and application of relevant tax rules and regulations, including in the field of VAT and corporate taxation, as well as specific aspects related to international trade and e-commerce.

How are transactions declared in the dropshipping business?

Declaring transactions in dropshipping trading is a critical process to ensure proper and accurate tax treatment. Under this model, all sales must be declared to the tax authorities through the monthly VAT return, where sales to individuals and legal entities are accounted for depending on the nature of the sale and the location of the customer. Typically, this involves providing a sales report or invoices issued to customers. In addition, an annual tax return is filed on an annual basis, which reflects all sales to customers, purchases of goods, expenses for transportation services and other income and expenses.

1. Monthly VAT return: Transactions are declared monthly, taking into account sales to individuals and legal entities. This usually involves providing a sales report or invoices issued to customers.
2. Annual tax return: An annual tax return is filed every year, which reflects all sales to customers, purchases of goods, expenses for transportation services and other income and expenses.

With the entry of the new system from 01.07.2021, dropshipping merchants have different trading opportunities and facilitate the process of declaring sales to individuals in the EU. They can register under mode OSS (One Stop Shop)that allows the declaration of sales of three months and the charging of VAT according to the country in which the customer received the goods. Sales from a warehouse in Bulgaria or Europe to individuals in Europe require the maintenance of an electronic sales register, which often overlaps with information from the platform or website. Another option is an import registration into the Union, designed to import goods worth less than 150 euros from third countries, thus facilitating customs treatment and requiring the declaration and payment of VAT on the importation of the goods.

What is the “One Stop Shop” regime according to Bulgarian and European tax legislation?

The Regime One Stop Shop (OSS)represents an evolution of the previous MOSS (Mini One Stop Shop) system, which facilitates VAT taxation of cross-border sales of services and goods within the European Union. It was introduced in order to reduce administrative burdens for businesses selling cross-border to end-users in the EU.

The OSS modeallows traders to register and declare VAT on their sales throughout the EU through a single e-shop in the country where they are established. This means that they do not need to register for VAT in every Member State where they have customers, which greatly simplifies the procedures.

The Regime USis divided into three main categories: the “non-Union” service regime, the “intra-Union” goods and services regime and the “Import” regime for distance sales of goods from third countries to final customers in the EU. Each of these categories addresses different aspects of cross-border taxation and is designed to ease the processes for the businesses concerned.

'Non-Union' regimeallows non-EU suppliers to register and declare VAT for the supply of services to end-users within the Union. This covers a wide range of services, including telecommunications services, radio and television broadcasting services and electronic services.

Regime 'in the Union'is aimed at suppliers established in the EU who sell goods or provide services to final consumers in other Member States where they are not registered for VAT. This regime also covers intra-Community distance sales of goods.

“Import” modeis designed to facilitate distance sales of goods from third countries or territories to final customers in the EU with a value of up to EUR 150. It allows goods to be exempt from VAT on importation, while ensuring that VAT is charged and collected at the time of sale to the final consumer.

ImportantIt should be noted that with the introduction of the OSS, the traditional thresholds for distance sales have been abolished and replaced by a Europe-wide threshold of EUR 10 000, above which sales are subject to VAT in the Member State of the consumer.

The Regime USis a significant step towards simplifying VAT taxation for businesses operating across borders within the EU by providing them with a single VAT registration and declaration mechanism. This not only reduces the administrative burden, but also improves compliance with tax requirements, thus helping to create a fairer and more transparent trading environment in the EU.

Taxation of dropshipping supplies

When considering taxation of dropshipping supplies, it is important to understand the various aspects and obligations that arise in the context of Bulgarian legislation, especially when it comes to transactions in which a Bulgarian company uses the dropshipping model to sell goods.

1. Commission when dropshipping:In the classic dropshipping model, the Bulgarian company acts as an intermediary between the end customer and the supplier, thus the company does not become the owner of the goods. Such operations are considered to be the provision of a service. If the commission is paid by a supplier outside Bulgaria, the company must register under Art. 97a of the VAT Act.
2. Trade in goods:If the Bulgarian company buys the goods before selling it to the customer (i.e. retail arbitration), this is considered a commercial activity. In such cases, for large volumes of transactions, the registration of a company is necessary for the legal regulation of the activity.
3. Tax Obligations:It is important to emphasize that as the volume of business increases, the likelihood of inspections by the NRA increases. Therefore, in order to avoid tax inconsistencies, it is advisable that the business be registered as an LLC or an EOOD. This facilitates taxation and allows the recognition of expenses related to the activity.
4. Taxation on sales on platforms such as Amazon, eBay, Etsy:When purchasing goods from an individual, the company must keep documentation of the transaction. When it comes to sales to individuals, the issuance of an invoice is not mandatory, but when the client is a company, it is necessary to issue an invoice.
5. VAT registration:It is important to note that commission and advertising payments to platforms such as Google, Facebook, Instagram or Google AdSense earnings require VAT registration.

VAT taxation on dropshipping

In the context of trading via dropshippingand related VAT taxation, Bulgarian companies intending to start such activity should take into account a number of specific aspects defined by Bulgarian and European tax legislation. This trading model includes situations in which a Bulgarian company sells goods to end customers in the EU without physically owning the goods — they are sent directly from a third party (e.g. an Italian company or a company registered in another EU Member State) to the customer.

1. The type of commercial operations and their tax regime:Trade by dropshipping can be considered as the supply of goods, where the place of performance of the delivery is related to the location of the goods at the time of the beginning of their delivery. According to the Bulgarian Law on Value Added Tax (VAT), if the goods are sent or transported from the supplier to the customer within the EU, the place of performance is usually considered to be the location of the goods at the time of completion of the transport.
2. Treatment of purchased goods:If the Italian company (a company registered in an EU Member State) issues an invoice to the Bulgarian company with 0% VAT, this usually means that the goods are subject to an intra-Community acquisition. Although the goods do not physically arrive in Bulgaria, the Bulgarian company must reflect these transactions in accordance with the rules for intra-Community acquisitions and sales.
3. Documents required to prove delivery:In order to prove the delivery of the goods to the final customers, the Bulgarian company must have documentation confirming that the goods were delivered by the company registered in the EU to the final customer, including a copy of the bill of lading or other transport document that allows the tracking of the shipment.

The above information reflects the general principles and rules that Bulgarian companies engaged in dropshipping must comply with in relation to VAT taxation. However, in each specific case, it is advisable to consult a tax law specialist from Elan Consulting in order to ensure full compliance with the legislation and to understand where and how it is possible to exercise the right to deduct VAT (the so-called VAT deduction). “Tax credit”).

Necessary documents for accounting of dropshipping trade

Accounting for dropshipping trade requires careful keeping of accounting documentation that reflects all operations related to sales and purchases. It is important to emphasize that proper documentation is key to proving the supply of goods, their reality and any resulting tax circumstances. Let's look at some of the key documents, which should be available to any dropshipping company:

• Invoice/order/order for delivery of goods to the customer:This document is the main one that displays information about the sale of a good to an end customer. It must contain details such as name and address of the customer, tax number (if applicable), name of the goods, quantity, price, delivery charge and VAT collected. It is important that this document also reflects the status of the payment.
• Proof of payment:Payments for orders are usually made through various payment systems such as PayPal, Stripe, bank transfer, virtual POS. Monthly statements from these systems serve as proof of payments received from customers.
• Invoice for the purchase of goods from a supplier:Any purchase of goods from the supplier must be documented with an invoice or other type of document that certifies the transaction. Like payments to customers, information about these payments is found in bank statements.
• Tracking number of delivery/bill of lading:This is one of the most important documents that proves that the goods were delivered by the supplier to the customer. It shows the route of the shipment from the point of origin to its final destination, and serves as proof of the delivery made in case of verification by the tax authorities.

It is important to note that any dropshipping enterprise must keep detailed accounting documentation that reflects all aspects of its commercial activities. This includes not only the above documents, but also any other documents related to transactions, such as correspondence with customers and suppliers, contracts, etc. Proper and complete documentation ensures not only compliance with legal requirements, but also facilitates business management and analysis.

Sample dropshipping contract for working with a trader/supplier/wholesaler

In this section, we present a sample of dropshipping contract, which serves as the basis for cooperation between us and our suppliers and trading partners. Our goal is to provide a transparent and effective framework for our relationships, thereby supporting the successful development of your business.

What is a dropshipping contract?

A dropshipping contract is a legal document that regulates the relationship between suppliers (merchants) and intermediaries in the process of selling goods without the need for their possession or storage by the intermediary. This model allows companies to expand their assortment and offer a variety of products to their customers without significant prior investment in inventory.

You can download the dropshipping contract here!