What to look for in a "friendly" onshore system and is Bulgaria a potential solution?
The following is a non-exhaustive list of features, in no especial order, that are commonly sought in financial planning (click on each topic to learn more concerning Bulgaria):
Yes, peaceful transition from Warsaw Pact membership to EU and NATO membership. Regular democratic elections with peaceful transition of power. The currency shadows the Euro.
Not perceived as an extreme tax haven. Membership of EU takes it out of the glare now being focussed on tax havens. Less “provocative” than Cyprus and Malta which are EU low tax jurisdictions that both have a past history of operating as tax havens. Using business entities established under the laws of another jurisdiction (for example, UK, USA, South Africa) but resident in Bulgaria for tax purposes may be helpful.
Full EU member (the largest world trading bloc)
Major international banks operate in Bulgaria and the EU “guarantees” free movement of capital. Accounts can be opened with banks outside Bulgaria. Opening bank accounts in Bulgaria is relatively fast and efficient. Accounts can be opened in major currencies (€, US$ etc.) and the local Lev currency (which shadows the Euro).
Companies and partnerships are permitted in the formats usually found in mainland Europe.
Bulgarian companies are relatively simple and rapid to form and the costs of formation are modest.
The European Company Statute allows a Bulgarian company to be established as a European Company. These companies have certain advantages and can be moved between jurisdictions within the EU and may be a route to a simple form of merger.
Bulgarian limited partnerships must have at least one “general partner” who does not have limited liability. Subject to certain restrictions a limited company can be the general partner thereby avoiding unlimited liability.
A limited partnership established under the laws of England or Scotland is less restrictive and would have no tax liability within the United Kingdom if none of the partners are resident there; there is no permanent establishment in UK and no business is conducted there.
Companies can be established under UK laws and will be considered to be only resident in Bulgaria pursuant to section 18 of the UK Corporation Tax Act 2009 if an application to the authorities confirms that to be the case – this is not quite as straightforward as the position before 1 January 2016 when the new treaty came into force. Under the previous treaty, the place of management and control of the company was sufficient to determine residence. Other countries, for example, South Africa and Singapore, can provide companies that under the existing treaties with Bulgaria will only be treated for tax purposes as resident in Bulgaria if management and control is centred in Bulgaria.
Another option is the use of a Limited Liability Company (LLC) incorporated under the laws of a suitable state in the USA (e.g. Delaware, Nevada).
Where companies with a share capital are required, there are a number of opportunities including, as mentioned above, limited companies incorporated under the laws of Singapore and, also, South Africa.
Thus, for those preferring a business entity governed by the laws of a non-civil code jurisdiction, the opportunity exists through the rules of residence (as modified by relevant tax treaties) and the relevant taxation laws in the jurisdiction of incorporation.
Yet, another possibility is to establish a branch (permanent establishment) in Bulgaria for a company or enterprise resident in another jurisdiction. Branch profits are taxed in the same way as Bulgarian companies (10% on profits).
Employment laws in Bulgaria provide a measure of protection to the employee but, given the relatively low wages prevailing in Bulgaria, it would be very unusual for an employer to have to pay more than €20,000 in compensation to an employee whose contract has been terminated and often the figure will be materially lower.
Bulgarian is the main language of Bulgaria and it uses the Cyrillic alphabet. A great deal of the vocabulary of the Bulgarian language consists of imported words mainly from French, Russian and English. Many modern technical words are derived from English. English is widely spoken in Bulgaria and is the primary foreign language learnt in schools. The majority of graduates in Bulgaria speak good English making them useful employees in Anglophone enterprises.
Bulgaria is well connected to the European rail and road systems with good major roads connecting the main cities and major cities in neighbouring countries. Sofia, the capital is served by a major international airport that is less than 30 minutes from the City centre.
The costs relevant to many businesses will primarily be premises and wages. Energy costs can be important as may other costs. Being within the EU will tend to ensure that costs of raw materials are not materially different than those prevailing in other member states. Costs of housing, food and transport will be relevant where ex-patriot employees are to be engaged.
Wages are relatively low by EU standards and the minimum wage is much less than that found in the larger EU countries to the west of Bulgaria. Currently (2016), they are 2.30 Lev per hour and 420 Lev per month which is roughly equivalent to €1.12 and €205 (this is uplifted each year by retail price inflation, currently less than 2%). In France, for example, it is €9.67 per hour, nearly 9x higher! Payroll taxes are also low by European norms. The following table shows the amounts payable by employees and employers on salaries of €1,000, 2,000 and 8,000 per month:
|Gross Salary||Gross Cost||Employer Pays||Employee Pays||Employee Nets|
Rents for commercial premises: offices can be rented in Sofia for between 5€ and 10€ per sq metre per month or 60 – 120€ per annum (or £5.58 to £11.15 per sq ft per annum). The rental often includes the provision of office furniture. This is clearly very much less expensive than London, Paris, Brussels and Berlin. Office premises can be purchased for between €900 to 1,800 per sq metre (€83.64 to €167.29 per sq ft).
Housing costs are low by European standards. Apartments in Sofia can cost around €1,000 per sq metre (around 94€ per sq ft)
Food and Transport these costs are less than those in many major European cities.
By way of example, the cost of living in Bulgaria (excluding rentals) is 53.22% lower than the UK (May 2016) while rentals in Bulgaria are 75.44% lower. Groceries cost, in London, more than double the cost in Sofia and London rents are seven times higher than those in Sofia.
Companies pay tax at 10% on their profits in Bulgaria.
There are no with-holding taxes on dividends paid by a Bulgarian company to its parent company (if the parent company is resident in the EU) and no with-holding tax on the remittance of branch profits to a foreign entity owning the branch. Other with-holding taxes are greatly reduced or eliminated in many cases by the extensive network of Bulgarian double tax treaties.
Bulgaria has an extensive network of double tax treaties with favourable with-holding tax rates and some unusual treaties including a treaty with U.A.E. and other middle-eastern states (see list and about-us-links needed for a list of full tax treaties concluded by Bulgaria). Assembling two or more companies in the appropriate jurisdictions can lead to optimising advantages under double tax treaties. Care needs to be taken that the structure is correctly established at the outset, as inserting a company into a structure purely or mainly to secure treaty benefits may be attacked in a number of jurisdictions as “treaty shopping”. The position with tax treaties should be kept under regular review as new treaties replacing old treaties or revisions to existing treaties can alter the tax analysis with potential adverse results.
Many jurisdictions have laws that deem the profits of a company’s subsidiaries to be the profits of the parent company for tax purposes where such subsidiaries were established in low/no tax jurisdictions wholly or mainly with a view to avoiding taxation. Bulgaria is favoured by not having CFC regulations. There is, however, a general anti-avoidance rule that can ignore a step in a series of transactions that was inserted wholly or mainly for tax avoidance motives.
Many jurisdictions have provisions in their tax codes that will deem income arising from transfers to a low/no tax structure to be the income of the individual who is viewed as the ultimate beneficial owner/controller of the structure. In many of Bulgaria’s treaties, the Other Income provision in the tax treaty (for example, Article 22 of the 2000 treaty with the Republic of Ireland) may over-ride the deeming provisions (in the case of the Republic of Ireland, section 806 of Taxes Consolidation Act 1997 as amended).
There is no wealth tax in Bulgaria. Gifts and succession taxes are recipient based and do not apply on transfers to lineal descendants and antecedents or between spouses. Gifts and bequests to more remote relatives and other persons are taxed. There is an exemption for the first 125,000€ for each recipient/beneficiary and thereafter the tax rates vary according to the degree of relationship and the municipality where the relevant asset is located. Relatives in the lateral line (siblings and their issue) pay tax at between 0.4 and 0.8%. More remote relatives and other persons pay tax at between 3.3% and 6.6%. For individuals resident outside Bulgaria who own shares in a Bulgarian company, it may, in some cases, be appropriate to place an overlying company in a suitable jurisdiction above the Bulgarian company.
Bulgaria has a good supply of well educated and trained individuals who are available at reasonable wages. For example, a chemical engineer might expect to be paid between €400 -700 per month while an accountant would expect between €220 – 575 per month.
By USA standards murder and violent crime in Sofia are much less than that prevailing in most major American cities. Statistics indicate falling levels of crime in Bulgaria.
As a member of the United Nations, NATO and the EU, Bulgaria has full international recognition.
As a member of the United Nations, NATO and the EU, Bulgaria has full international recognition.
Inexpensive and works well in big cities.
Good infrastructure with road and rail services, schools, universities and hospitals and all the facilities that are to be expected in a modern European country.
At 1 hour ahead of Central European time, there is an excellent overlap with Western Europe, the Middle East, Eastern Africa and South and Central Asia. There is a good overlap with USA (especially the East Coast) and a better overlap of one hour with the Far East than is the case in Western Europe.
Hot summers, cold winters and equable spring and autumn. Conditions are generally good for those who like the seasons with good skiing opportunities in winter not far from Sofia and the Black Sea to the East and the Mediterranean Sea to the South.
Not as easy as in common law jurisdictions but less difficult than conditions in Club-Med countries and France. Using entities established under the laws of other appropriate jurisdictions but which are treated as resident in Bulgaria for tax purposes can further reduce the administrative burden.
Good about-us-links with competitively priced travel to many destinations.
As a full member of the EU and the WTO, access to markets is very straightforward. This is likely to be further improved when the EU concludes the TTIP agreement which (in May 2016) is expected in the near future.
While many jurisdictions share some of the advantages listed above, there are very few that have all of them. Bulgaria is almost unique in that respect. Bulgaria can provide entities established under Bulgarian laws and it can host (provide a fiscal residence for) non-Bulgarian entities to suit the needs of our clients.