When should individuals declare loans and interest?

In practice, it sometimes happens that a natural person grants a loan to another natural person or to a legal person (a commercial company). The Personal Income Tax Act /PIT Act/ sets out rules defining when individuals are required to declare, in their tax return under Article 50 of the PIT Act, loans granted and received, as well as interest income.

Pursuant to Article 50(1)(5) of the Income Tax Act, resident individuals must submit a standard annual tax return for cash loans granted or received, as follows:

(a) the outstanding portion of cash loans granted during the tax year, if their total amount exceeds 10,000 BGN;

(b) any outstanding balances at the end of the tax year arising from cash loans granted during that tax year and the preceding five tax years, provided that the total amount of such balances exceeds 40,000 BGN;

(c) the outstanding portion of cash loans received during the tax year, if their total amount exceeds BGN 10,000, with the exception of loans received from credit institutions within the meaning of the Credit Institutions Act;

(d) any outstanding balances at the end of the tax year arising from cash loans received during that tax year and the preceding five tax years, with the exception of loans granted by credit institutions within the meaning of the Credit Institutions Act, provided that the total amount of such outstanding balances exceeds 40,000 BGN.

When granting a loan, an interest rate must be set. Pursuant to § 1(7) of the supplementary provisions of the Income Tax Act, ‘interest’ is income arising from any type of debt claim, whether secured by a mortgage or by a clause providing for a share in the debtor’s profits, including interest on bank deposits and income (premiums) from debentures and bonds. When determining the interest rate.

Article 77 of the Income Tax Act applies, pursuant to which, when determining the liabilities of persons under this Act in cases of transactions between related parties, transactions concluded on terms whose fulfilment leads to tax avoidance and the application of arm’s length prices, transfers linked to a specific base, as well as interest on finance leases, the provisions of the Corporate Income Tax Act relating to the prevention of tax avoidance shall apply accordingly.

This means that interest should be determined on a market basis. Pursuant to Article 8(6)(4) of the Income Tax Act, the following income, accrued or paid by local entities, from commercial representations, as well as from a place of business or a fixed establishment in the Republic of Bulgaria: interest, including interest under a leasing agreement. Interest income arising from a loan granted by a natural person is not included amongst the types of non-taxable income listed in Article 13 of the Income Tax Act; consequently, it is taxable.

Pursuant to Article 37(1)(3) of the Income Tax Act, the following income from a source in Bulgaria, accrued or paid to foreign individuals, is subject to final tax regardless of the circumstances set out in Article 13, the following income from a source in Bulgaria, accrued or paid to foreign individuals, is also subject to final tax where it is not realised through a permanent establishment in the country: interest, including that contained in lease payments, with the exception of interest on bonds or other debt securities issued by the State or local authorities and admitted to trading on a regulated market in the country or in a – a Member State of the European Union, or in another country that is a party to the Agreement on the European Economic Area.

Under Article 38(11) of the Income Tax Act, taxable income in the form of interest on loans to a co-operative, received by a member of that co-operative, is subject to final tax.

What does this mean in practice?

If you have granted a loan or loans:

You must declare them if:

• the total amount of all cash loans granted during the year exceeds 10,000 BGN and, as at 31 December of the same year, some of them remain outstanding;
• As at 31 December of that year, the total outstanding amount on all cash loans granted during that year and the preceding five years exceeded 40,000 BGN.

You must declare any loans granted in Annex 11 of your annual tax return, in accordance with Article 50 of the Income Tax Act. The deadline for declaring loans is from 10 January to 30 April of the following year.

If you have taken out a loan or loans:

You must declare them if you have received a loan or loans from individuals or non-bank institutions and the following conditions are met:

• the total amount of all cash loans received during the year exceeds 10,000 BGN and, as at 31 December of the same year, part of them remains outstanding;
• As at 31 December of the year, the total outstanding amount on all cash loans received during that year and the preceding five years exceeded 40,000 BGN.

If you have taken out loans from a bank, you do not need to declare them. You must declare loans received from individuals or non-bank institutions in Appendix 11 of your annual tax return, in accordance with Article 50 of the Income Tax Act. The deadline for declaring loans is from 10 January to 30 April of the following year.

If you have received interest:

The following interest income, as set out in Article 13 of the Income Tax Act, is exempt from tax:

• Interest income on deposits held in a Member State of the European Union (EU) or in another country that is a party to the Agreement on the European Economic Area (EEA): 
• banks;
• bank branches;
• Interest and discounts on Bulgarian government, municipal and corporate bonds, as well as on similar bonds issued in accordance with the legislation of another EU Member State or of a country a party to the Agreement on the European Economic Area, acquired by resident individuals and non-resident individuals established for tax purposes in an EU Member State or an EEA country (Article 13(1)(9) of the Income Tax Act);
• Interest on bonds or other debt securities issued by the State or local authorities and admitted to trading on a regulated market or a growth market during the period from 1 January 2021 to 31 December 2025 in Bulgaria or in a Member State of the European Union, or in another state party to the Agreement on the European Economic Area, acquired by foreign individuals. 
• Interest on court-ordered claims that is not subject to taxation (Article 13(1)(10) of the Income Tax Act).

            ‘Deposit’ means a credit balance arising from funds held in an account, or from temporary positions arising from normal banking transactions, which the bank is obliged to pay out in accordance with the applicable statutory and contractual terms, with the exception of a credit balance for which any of the following conditions is met:

• its existence may only be proven by means of a financial instrument within the meaning of Article 4 of the Financial Instruments Markets Act, unless it is a savings product evidenced by a certificate of deposit issued in the name of a specific individual and existing as at 2 July 2014;
• its principal is not repayable at par;
• its principal is payable at par value only by virtue of a specific guarantee from, or an agreement with, the credit institution or a third party;
• is not own funds within the meaning of the definition in Article 4(1)(118) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, p. 1, 27 June 2013), hereinafter referred to as ‘Regulation (EU) No 575/2013’, or debt securities issued by a bank, and obligations arising from a promissory note or as a result of a written undertaking by a paying bank to honour the order of the issuer of a bill of exchange.

Interest rates on deposits held by domestic and foreign individuals with banks and bank branches established in Bulgaria

Tax-exempt interest income from deposits held with banks and branches of banks established in Bulgaria relates to income received by local individuals, as well as by foreign individuals, who are residents of an EU Member State or another country party to the EEA Agreement.

Interest income on deposits held with banks and branches of banks established in Bulgaria, held by foreign individuals:

Under Article 8(6)(4) of the Income Tax Act, income from a source in the Republic of Bulgaria includes interest income accrued by local persons, commercial representations, as well as from a place of business or a fixed base in the Republic of Bulgaria, including interest under a leasing agreement. Foreign individuals are liable for tax on income derived solely from sources in the Republic of Bulgaria.

Interest income on deposits held with banks and branches of banks established in Bulgaria is not subject to tax where the foreign individuals are residents of EU Member States and the EEA. Pursuant to Article 37(7) of the Income Tax Act, income referred to in Article 37(1) of the Act which is exempt from tax under Article 13 and accrued or paid to foreign individuals resident for tax purposes in an EU Member State or in another EEA Member State. The circumstances referred to in Article 37(7) of the Income Tax Act shall be certified to the payer of the income by means of a document issued by the tax authority of the country in which the person is resident for tax purposes, and a declaration by the person receiving the income that the circumstances referred to in Article 13 of the Act apply.

Where foreign individuals are resident for tax purposes in countries outside the EU and the EEA, interest income on deposits held with banks and branches of banks established in Bulgaria is taxed in accordance with Article 37(1), point 3 of the Income Tax Act, with a final tax calculated on the gross amount of the income accrued. The final tax is withheld and paid by the bank by the end of the month following the quarter in which the income was accrued.

Interest rates on deposits held by local individuals with banks and bank branches established abroad

Income received by local individuals from interest on deposits held with banks and branches of banks established in countries outside the EU and the EEA, (income that does not fall within the scope of tax-exempt income) is subject to tax on the total annual tax base in accordance with Article 35(3) of the Income Tax Act. Taxable income is the gross amount of income earned during the tax year. In such cases, there is no advance taxation

Other interest income subject to tax on the total annual tax base

Interest that is not exempt from tax, other than interest on bank accounts, is subject to tax on the total annual tax base (Article 35(3) of the Income Tax Act), including interest contained in lease payments received during the tax year, for example, interest income from loans granted to businesses. The tax rate is 10 per cent.

Cash income from interest under Article 35 of the Income Tax Act is subject to advance tax in accordance with Article 44a of the Income Tax Act where the payer is a business or a self-employed person. The advance tax is determined, withheld, paid and declared by the payer of the income – the undertaking or the self-employed person. No advance tax is payable for the final quarter, unless the individual expressly requests this in writing from the enterprise acting as the payer by means of a written declaration.

Interest on loans to housing cooperatives

Interest income received by a member of a co-operative from loans granted to the co-operative is subject to a final tax of 10 per cent (Article 38(11) and Article 46(1) of the Income Tax Act).

The individual receiving the income is not required to file a tax return with the National Revenue Agency, as the tax is final.

The responsibility for withholding and paying the tax lies with the co-operative, as the payer of the income, which must, by the end of the month following the quarter in which the individual received the income, must pay it into the state budget via the account of the relevant regional directorate of the National Revenue Agency at its place of registration (Article 65(7) of the Income Tax Act). Within the same timeframe, the cooperative must submit electronically a return under Article 55(1) of the Income Tax Act, using the approved form, for the taxes due. The date on which the income is received is determined in accordance with the rules set out in Article 11 of the Income Tax Act.

A natural person granting a loan is obliged to declare it in their annual tax return under Article 50 of the Income Tax Act, provided they meet the necessary conditions.

Declaration and payment of interest income

Local individuals who have received tax-exempt interest income may declare such income on a voluntary basis in Annex 13 to their annual tax return, in accordance with Article 50 of the Income Tax Act.

Local individuals who have received interest income subject to tax on the total annual tax base (including from abroad) must declare such income in Schedule 6 of their annual tax return, using code 603, between 10 January and 30 April of the year following the year in which the income was received.

The final tax due on taxable interest income received by individuals is declared in the tax return under Article 55(1) of the Personal Income Tax Act (Form 4001) submitted by the enterprise – the payer of the income – by the end of the month following the quarter in which the individual received the income, and this must be submitted electronically. Income subject to final tax may be declared by resident individuals in their annual tax return under Article 50 of the Income Tax Act only at the individuals’ discretion.

Where the payer of interest income to foreign individuals is an enterprise or a self-employed person within the meaning of the Social Security Code (SSC), the payer shall withhold and pay the tax by the end of the month following the quarter in which the income was accrued by the undertaking or paid by the self-employed person, into the state budget via the account of the National Revenue Agency’s territorial directorate at the place of registration of the payer of the income (Article 67(1) of the Income Tax Act). The return under Article 55(1) of the Income Tax Act must be submitted electronically within the deadline for paying the tax.

Where the payer of taxable interest income is not a business or a self-employed person, the tax is paid by the individual receiving the income into the State budget, to the account of the relevant Tax Directorate of the National Revenue Agency at:

• permanent address;
• the permanent address of the authorised representative, where you have received income through an authorised representative with a permanent address in the country;
• in Sofia City for all other cases.

Income subject to final tax is declared in the tax return under Article 55(1) of the Income Tax Act. Given that the tax is final, the foreign individual receiving the income does not need to submit an annual tax return, except where the conditions for a recalculation of the final tax are met (Article 37a of the Income Tax Act).

Statement of income paid 

Enterprises and self-employed persons within the meaning of the Social Security Code – as payers of income – must submit, electronically and at their place of registration, by 28 February of the following year, a standardised statement (Article 73(1) of the Income Tax Act) detailing the income paid during the year and the tax withheld during the year:

• interest income subject to tax on the total annual tax base, payable to local and foreign individuals;
• interest income under Chapter Six, subject to final tax, in favour of local and foreign individuals, with the exception of those subject to declaration in accordance with Article 142(5) of the Tax and Social Security Procedure Code;
• tax-exempt interest income under Article 13(1) of the Income Tax Act paid to local individuals.

 
Upon the dissolution or winding-up of an enterprise, the statement referred to in Article 73 of the Income Tax Act (as well as the return under Article 55 of the Income Tax Act) shall be submitted within the time limits and in accordance with the procedure for submitting the tax return under Article 162 of the Corporate Income Tax Act (CITA).

Tax Payment Certificate

A standard certificate confirming that tax has been paid by a foreign person in accordance with the Income Tax Act is issued at the person’s request. The request shall be submitted to the Regional Tax Directorate of the National Revenue Agency where a tax return under Article 50 or 55 of the Income Tax Act has been filed or is required to be filed (Article 58(1) of the Income Tax Act).

 Recovery

Any overpaid tax or amounts unduly paid in respect of tax on income earned by foreign individuals shall be refunded by the tax office of the National Revenue Agency to which the tax on that income is payable (Article 66(2) and Article 68(4) of the Personal Income Tax Act).

Agreement for the Avoidance of Double Taxation (DTA)

It is possible that the applicable double taxation agreement on income and capital between Bulgaria and the country in which the individual is a resident may provide for a different tax regime. The procedure for applying the agreements in respect of foreign individuals is set out in Chapter Sixteen, Section III, Articles 135–142 of the Tax and Social Security Procedure Code (TSSPC) and is initiated by the person receiving the income.