The Bulgarian National Bank (BNB), established in 1879, operates as the central bank of Bulgaria. Its main objective is to maintain the stability of the national currency by implementing adequate policies and an efficient payment system. BNB regulates and supervises, controls commercial banks’ trade in and settlement of government securities, and has the exclusive right to issue banknotes and coins in Bulgaria.

Bulgaria’s banking sector journeyed far to reach the high levels of growth, expansion, and confidence evident today. Bank supervision was lax during the early 1990s; state-owned banks systematically granted large loans to state industries at a loss, which led to a pronounced deterioration of their asset quality. In the private sector, collusive relations between banks and entrepreneurs resulted in the granting of large loans with little or no collateral and only faint prospects of repayment. In 1996, a plummeting Lev, soaring interest rates, and BNB restrictions on liquidity led to severe banking crisis. Net losses to the economy were estimated at USD 1.5 billion.

In 1997, a Currency Board was introduced in Bulgaria and the number of monetary policy instruments at BNB’s disposal was significantly reduced. Bad loans to enterprises were converted by law into state bonds with low interest rates for the first six years. The tightening of regulatory controls and the positive effects brought about by the introduction of the currency board have helped the sector to gradually regain confidence.

The banking system has now completely stabilized and continues to mature. Bulgaria hosts 30 commercial banks, including branches from five foreign banks. Bulgaria has almost completely privatized its state-owned banks, with an exception of Municipal Bank (pending privatization) and Encouragement Bank. Privatization has attracted strategic investors in the form of solid foreign banks. The high level of foreign investment in the Bulgarian banking system supports the development of the country’s banks and enhances the sector’s corporate governance practices and transparency. About 90% of Bulgarian bank assets are owned by large foreign banks that are already well established in Central and Eastern Europe, or by banks that are committed to achieving prominent market shares in the region.

In its latest research about Bulgaria’s banking market, “Research and Markets” has announced that the country’s banking assets will continue to grow at 9% in nominal terms, to reach 89 billion BGN by the end of 2011. Despite global turmoil, future prospects for the banking sector in Bulgaria are still relatively good. Most of the banks in Bulgaria seem to be well prepared for the situation—they have enough own funds and retained profits.

Some of the major shortfalls of Bulgaria’s bank sectors include sluggish corporate loan granting process and underdeveloped e-banking.

Currency
The introduction of the Currency Board in Bulgaria in July 1997 led to improved confidence in the local currency, predictable exchange rates, and lower rates of inflation. After the introduction of the currency board, all constraints to trading with foreign currency within the country were removed. Local banks can sell hard currency to private and legal entities without any limitations.

The currency unit in Bulgaria is the Bulgarian Lev, or BGN.  Since 5 July 1999, the Bulgarian Lev was denominated in ratio BGN 1,000 to BGN 1 in order to facilitate payments, accounting, and exchange operations. At present, the BGN is fixed to the EUR at the rate of BGN 1.95583 per EUR 1. The Bulgarian National Bank has announced the Lev’s referents rates to other major foreign currencies on the basis of their international market rates.

The policy of both the BNB and the government is that the currency board will remain in place until Bulgaria joins the European Economic and Monetary Union (EMU), which is expected to take place in 2010-2011.

Tax System
Bulgaria offers one of the most economically stimulating taxation law systems in Europe. As part of the EU, Bulgarian citizens are given special taxation treatment.
Personal Income Tax
Bulgarian residents under the Personal Income Tax Act are persons who:

• Have a permanent home in Bulgaria
• Spend more than 183 days of each 365-day period in Bulgaria
• Are sent abroad by the State of Bulgaria and members of their families
• Have their vital interests centered in Bulgaria
• Since 01 January 2008, a 10% flat income tax rate was introduced in Bulgaria. The only exception to this rate applies to income earned as sole proprietor, which is fixed at 15%.

Employment Income
Tax on employment income is withheld by the employer and is remitted to the state budget on a monthly basis. Emoluments from employment include salary, bonuses, benefits-in-kind, inflationary compensation, and more. Travel and accommodation business trip expenses, as well as the amount of per diems up to double the amount of the statutory per dimes, is tax exempt given adequate documentation. Furthermore, certain social benefits provided by employers are tax exempt when taxed at the level of the employer.

In addition, employers are obligated to recalculate the final personal income tax liability due on an annual basis. The salary tax is calculated on the gross amount of income received in a given month, after the statutory deductions, which are as follows:

• Mandatory social security and health insurance accounts
• Voluntary pension and voluntary unemployment insurance for up to 10% of the gross income amount
• Life insurance and voluntary health insurance for up to 10% of the gross income amount
• Donations to certain institutions for up to 5% of the annual taxable base after the above deductions and up to 50% if given to fund for children’s medical treatment

Alternatively, the tax relief for voluntary pension and unemployment contributions, for life and insurance and for voluntary health insurance, may also be utilized as a benefit upon the annual recalculation of the taxable income (mandatory for each employer), or upon filing an annual tax return.

Non-employment Income Tax
Royalty and interest income, income from share participations, and income from the sale of movables, etc., are taxed annually. Directors of companies that render services under management contracts are also taxed following the non-employment rules applicable to income.

In addition, individuals performing economic activity as sole traders are required to adjust their taxable income under the rules stipulated in the Corporate Income Tax Act.

The tax rates in FY 2008 for non-employment income are 10% flat rate for income realized as a sole trader.

Individuals receiving other employment income (freelancers, rental income) are liable to monthly advance payments at 10% calculated on the gross amount of the income received, after the statutory. The applicable deductions are as follows:

• 40% of any income from agricultural, forestry, and fishery activities
• 40% of any income from intellectual property exploitation, or sale
• 25% of any free-lance income
• 10% of any rental income
• Mandatory social security and health insurance for the account of the individual; voluntary pension; voluntary unemployment insurance for an amount up to 10% for the gross income amount after statutory deductions
• Life and health insurance for an amount up to 10% of the gross income amount after statutory deductions
• Donations to certain institutions—up to 5% of the annual taxable base after the above deductions; and exceptionally up to 50% of the annual taxable base after deductions for donations that fund children’s medical treatment

Individuals are obligated to report their income by filling an annual tax return and paying the annual tax as per the tax return by 30 April of the following year. In case the individuals earn employment income only, there is no obligation for them to file an annual tax return.

Corporate Income Tax
The corporate income tax rate is 10%. Bulgarian corporate income tax is imposed on the profits of tax liable persons according to the Bulgarian Corporate Income Tax Act. Tax liable persons are all Bulgarian companies and other corporate entities registered in Bulgaria, as well as non-incorporated entities, including partnerships. The act applies to their profit from business activities. Foreign legal entities are taxed on their profits from activity in Bulgaria, including those conducted via a permanent establishment in Bulgaria. For the purpose of taxing income sourced from Bulgaria, any organizationally and economically distinct non-resident formation (trust, fund, and other) which independently carries out economic activity or performs and manages investments shall likewise be a taxable entity where the owner of the entity cannot be identified.

Special taxation regimes apply for certain activities, such as gambling establishments.

Tax liable persons should file their annual Corporate Income Tax Return and pay the corporate income tax due for the fiscal year no later then 31 March of the following year.