What Are Double Taxation Treaties?

When you earn income in one country while being a tax resident of another, both countries may want to tax that income. Double taxation treaties (DTTs), also called double taxation avoidance agreements, are bilateral agreements between countries that prevent this from happening. Bulgaria has signed DTTs with over 70 countries, making it an attractive base for international business.

For expats living in the Troyan area and the Lovech region, understanding these treaties is essential for proper tax planning.

How Double Taxation Treaties Work

DTTs work by assigning taxing rights to one or both countries, and then providing a mechanism to eliminate double taxation. The two main methods are:

Credit Method

You pay tax in both countries, but the country of residence gives you a credit for tax paid abroad. For example, if Bulgaria taxes your income at 10% and your home country taxes it at 25%, you pay 10% in Bulgaria and only 15% more at home.

Exemption Method

One country exempts the income from tax entirely, leaving only the other country to tax it. This is less common but applies to certain income types under specific treaties.

Key Countries with Bulgarian DTTs

Bulgaria has treaties with most major economies. Here are some commonly relevant ones for expats:

• Germany - Covers employment income, dividends, interest, and royalties
• United Kingdom - Comprehensive treaty covering most income types
• France - Includes provisions for pensions and government service
• Netherlands - Favorable terms for dividends and capital gains
• Austria - Covers business profits and employment income
• United States - Full treaty covering all major income categories
• Russia - Important for the significant Russian-speaking community
• Turkey - Covers business profits and investment income
• Israel - Comprehensive coverage
• Canada, Australia, Japan - All have active treaties

What Income Types Are Covered?

Most Bulgarian DTTs cover the following income categories:

Business Profits

Generally taxed only in the country where the business has a permanent establishment. If your Bulgarian company does not have a permanent establishment in another country, Bulgaria has the sole taxing right on those profits.

Dividends

The treaty typically reduces withholding tax on dividends paid across borders. Bulgaria’s domestic dividend withholding rate is 5%, but treaties may reduce this further, sometimes to 0% for qualifying corporate shareholders.

Interest and Royalties

Similar to dividends, treaties often reduce or eliminate withholding taxes on interest and royalty payments between treaty countries.

Employment Income

Usually taxed in the country where the work is performed, with certain exceptions for short-term assignments (the “183-day rule”).

Capital Gains

Rules vary by treaty and asset type. Gains from selling shares in a Bulgarian company may or may not be taxable in Bulgaria depending on the specific treaty.

Pensions

Many treaties allow pensions to be taxed only in the country of residence, not the country that paid them. This makes Bulgaria attractive for retirees receiving pensions from abroad.

How to Claim Treaty Benefits

Simply having a treaty in place does not automatically prevent double taxation. You must actively claim the benefits:

Step 1: Determine Your Tax Residency

You must establish which country considers you a tax resident. Bulgaria considers you a tax resident if:

• You have a permanent address in Bulgaria
• You spend more than 183 days per year in Bulgaria
• Your center of vital interests is in Bulgaria

Step 2: Obtain a Tax Residency Certificate

Request a certificate from the Bulgarian National Revenue Agency (NRA) confirming your Bulgarian tax residency. This is essential for claiming treaty benefits in the other country.

Step 3: Apply the Treaty Provisions

Depending on the income type, you may need to:

• File a reduced withholding tax application
• Claim a foreign tax credit on your Bulgarian tax return
• Present the tax residency certificate to the payer abroad
• Complete specific treaty relief forms

Step 4: File Correctly in Both Countries

Ensure your tax returns in both countries properly reflect the treaty provisions. Errors can trigger audits or result in double taxation that could have been avoided.

Common Mistakes with DTTs

• Assuming automatic application: You must claim benefits actively
• Not keeping records: Tax authorities may request proof of foreign tax paid
• Ignoring state/regional taxes: Some treaties only cover national-level taxes
• Forgetting about social security: Separate bilateral agreements may apply
• Relying on outdated information: Treaties are occasionally renegotiated

Social Security Agreements

Separate from DTTs, Bulgaria also has social security agreements with various countries and, as an EU member, participates in EU social security coordination rules. These determine which country you pay social contributions to.

For EU citizens, the general rule is that you pay social security in the country where you work, not where you live. Exceptions exist for posted workers and people working in multiple countries.

Planning Ahead

Tax treaty planning should be done before you establish your business structure in Bulgaria, not after. The way you structure your company, your management contracts, and your dividend policy can all be optimized based on the applicable treaty.

Expert Guidance in Troyan

At our office in Troyan, we work closely with tax advisors in the Lovech region to ensure our foreign clients benefit fully from Bulgaria’s extensive treaty network.

Contact Attorney Biser Dimov for advice on how double taxation treaties apply to your specific situation.