“TAXATION OF NGOs IN BULGARIA” (2004)

The publication “Taxation of Not-for-Profit Legal Entities” is a survey of the current tax regime for not-for-profit organizations. The authors of the book, Ilian Krilov and Mitko Stoikov, are experts from the Tax Policy Directorate and the Supreme Tax Directorate.

The purpose of the book is to present a comprehensive picture of the tax regime of not-for-profit organizations according to the Bulgarian legislation and to find the answers to important practical issues like taxation through corporate tax and tax at source, treatment of donations and exemptions for donors to not-for-profit legal entities (NPLE), local tax liabilities of NPLE.

The first part of the publication makes an overview of the general principles in the tax regime of NPLEs. It sets out their obligations for tax registration, the obligation to provide information in the National Statistics Institute (NSI), the registration in the National Social Security Institute (NSSI), as well as the penalties resulting from noncompliance with those requirements. According to the tax registration procedure, the local not-for-profit legal entities are obliged within 14 days of receiving the court decision to register in the tax office. The tax registration is related to the emergence of a number of rights and obligations of tax subjects. So NPLEs are obliged to specify all data subject to entry and when there is a change in the declared data, the taxable person is obliged to declare the new data within 14 days after the change has occurred. All the notfor- profit legal entities are entered in the BULSTAT register within 3 days of the deed of establishment.

NPLEs present annual financial reports to the National Statistical Institute. The contents of the annual financial reports include:
– Financial statement;
– Report on revenues and expenditure – one or two-sided;
– A cash flow report;
– A report of one’s own capital;
– An appendix to the annual financial report.

Under the Statistics Act, NPLEs submit reports to the NSI by March 31 of the following calendar year.

The conditions for deregistration of non-governmental organizations are elucidated, along with the circumstances of the process.

The second part of the book reviews the taxation of income under the Corporate Income Tax Act (CITA). NPLE are taxable persons under the CITA when they conduct business activity or rent movable or real estate property. The tax treatment of the various types of income for the not-for-profit legal entity is reviewed depending on whether they result from business or non-profit activity.
An interpretation is made of the term “business activity” which is deemed to be any activity performed by NPLE if compensation is received specified on a market basis and the final objective is to generate profit. It is made clear that the income from funding and grants, as well as from donations is not subject to corporate tax. The income from membership fees is not considered a business activity income but there is a provision that in case such income evolves into a tool for evading the law, the tax authorities can determine an amount of the tax that would be applicable if there is no deviation from the law. The income from interest on funds in banks is non-taxable.

As regards the taxation of income from dividends and liquidation proceeds a tax at source is levied which amounts to 15 per cent. This tax is payable by the local legal entities and unincorporated organizations which have distributed dividends and liquidation proceeds.

The authors review in detail the distinction between income and expenses from business and non-business activity. Examples are given for tax collection when organizing a seminar and according to the authors when the fee is calculated so that it only covers the expenses there is no tax liability. The income from funds received from organized charity sale is also non-taxable and should not be regarded as an income from business activity because this is not an activity whose goal is generating profit.

The section covers the issue of allocating the general expenses that cannot be defined as made for business activity only. A practical example is quoted to clarify that such expenses are only deducted by multiplying them by a coefficient calculated as specified by law.

The end of the second part elucidates the procedure for submitting tax return and paying the tax, and describes the types of advance payments for the corporate tax and how to determine them. The entities which have ended the previous year with a profit make monthly advance payments, while the entities that have been set up the previous year and the entities whose taxable profit is zero, make quarterly advance payments.

The third part reviews the legal framework for the taxes deducted at source, and the topic is structured into three sections. The first section, Taxes collected at source on certain types of expenses, clarifies the final tax at source on social expenses payable by all employers irrespective of whether they conduct business activity or not. The same regime is applied when applying tax at source on the expenses for payments to funds for voluntary social security and life insurance.

The taxation of expenses for maintenance, repair and use of cars and the so-called entertainment allowance and sponsorship expenses are reviewed.
The fourth part of the publication is dedicated to tax treatment of donations as a topic of crucial importance when clarifying the tax regime of not-for-profit organizations.

The various ways of reporting the donations are reviewed. The first possibility is by reporting it as expense, and the second – when transforming the financial result.

The NPLE which has made a donation and has reported it as expense is liable to a final tax at source on this expense where the latter is not included when calculating the tax base. The tax is paid by the 15th day of the month following the month of charging it.

In the second approach for treating the donations, according to Art.23, item 3, para. 1 of the CITA, the donation amount is deducted from the financial result to the amount of 10 per cent before the tax transformation.

The prerequisites that should be available to claim a tax relief are described:
– the donations should be made from the reserves or the non-distributed profit;
– the donation should be to the benefit of persons expressly listed in the law – Art. 23, item. 3, para.1, b. “a” – b. “l”;
– the donation should be made on the basis of a written contract;
– the donation should not benefit the managers who grant or manage it;
The natural persons who can use tax relief for donation in accordance with the Taxation of the Income of Natural Persons Act (TINPA) are listed below:
– persons who work under labor relations or relations that are attributed equal status;
– freelancers and persons providing other activities and services outside labor relations;
– persons who manage and supervise against payment;
– persons receiving income from rent, annuity or lease.

As regards the local tax on a donation under the Local Taxes and Fees Act, NPLEs are exempt from taxes on donations received and made when they are registered as entities to public benefit and are entered in the Central Register at the Ministry of Justice. It is underscored that amounts received through projects are not treated as donation and no tax is levied on them because, in essence, they are targeted funding and not aid. The tax on donation is paid before the property is transferred.

The fifth part of the book covers other taxes owed by NPLEs under the Local Taxes and Fees Act. NPLEs are liable to tax on the real estate property levied on all taxable subjects that have acquired real estate on the territory of Bulgaria. NPLEs are liable to tax when they acquire a motor vehicle as well. The tax on motor vehicles as well as road tax is payable by NPLEs that own such vehicles. When the ownership of a vehicle is being transferred, the new owner does not pay tax if the previous owner has already paid it for the remainder of the calendar year.

The last sixth part pays special attention to the patent tax under the TINPA. The authors make it clear that when NPLEs implement some of the activities under Art. 31 and 32 of the TINPA and have an annual turnover from the previous year up to 50,000 BGN, they are subject to taxation with a final patent tax whose amount depends on the type of activity and the seat where this activity is implemented.