The application of tax treaties
International taxes are a complex matter but we will try to simplify the basics. There are two main concepts that you need to understand if you consider making use of the low taxies in Bulgaria:
- Tax residency
- Taxation of international income and specifically income from commercial activities
You pay your taxes in the country that you are considered a tax resident of. When moving from one country to another you must consider that your tax residency does not automatically follow your actual residency. Every country applies certain criteria for individuals that are to be considered tax residents of this country. Usually this criteria involves one of the following:
- Staying for more than 183 days in the country for a calendar year.
- Having a permanent address in the country.
- Having a centre of vital interests in the country.
When one of these criteria is present in more than one country, the respective countries need to decide which one is going to consider you a local tax resident. That’s why countries sign tax treaties and these treaties are important to consider until which moment you need to pay taxes in your home country.
Your tax residency is determined for a financial year. This usually coincides with the calendar year.
If you pay yourself remuneration you will be entitled to also pay social security contributions. More on them below.
Taxation of income derived from commercial activity
Under most tax treaties, what you earn as a freelancer is considered an income derived from commercial activity. This is a rather special type of income which is usually only taxed at the country where it is derived from.
What does that actually mean? It means that when working as a freelancer in Bulgaria your income will be taxed here even if your tax residency hasn’t yet changed. Whether you need to pay additional tax in your home country is decided according to the provisions of the respective tax treaty.