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Distribution of dividends in Bulgaria can be done only once per year. There are however legal options to distribute part of the profit more frequently…

Euroformat.eu

By law, dividends in Bulgaria are distributed only after the end of the financial year. This is when the shareholder sign the financial report and determine what the profit for the previous year is. In case of a loss, no dividends should be paid out, unless there are profits from earlier years.

Many foreign investors in Bulgaria however are willing to get paid (in form of dividends) more often. So is this legal and is it possible at all?

The legal challenges

Taxation

Dividends are taxed at 5% at source when paid out to private individuals. If dividends are distributed to another company (holding structure), then there is no dividend tax due.

So what happens if a company pays out some of its profits to its shareholder(s) in the middle of the year?

Hidden distribution of profits

In this case, after the amendment of the tax laws in 2010, this will qualify as “hidden distribution of profits“. This is (as the name implies) quite a tricky thing to do and if not filed correctly, it may cost dear to the company. Hidden distribution of profits need to be reported to the tax authorities immediately and self-taxed on the spot. If that is done, it will qualify just like a dividend and will be taxed at the same rate. If the payouts are not declared accordingly, the tax authorities will impose hefty fees and will tax the payouts on top of that. The penalties for hidden distribution of dividends are one of the highest by the Bulgarian tax codes.

Another consequence of not declaring hidden distribution of profits is that when the company has unpaid liabilities towards the state (taxes, etc.). In this case, the shareholders who have received these payouts will be personally co-responsible with the company for its liabilities. So far with the “limited liability” presumption…

The commercial law

There is also another point of concern if the company distributes dividends from the current year’s profits. In case of liquidity difficulties, these may be as result of the amounts that have been paid to the shareholders. There are very few court cases in Bulgaria that relate to similar cases, so it is hard to predict whether the shareholders will be held personally liable for the debts of the company in such scenario.

The legal solution

The legal solution is quite obvious:

Dividends should be paid out only once per year, after the acceptance by the shareholder of the annual financial report for the previous year. And this is of course, only if there are profits to be distributed.

If the need arises for intermediary payouts, then these need to be immediately declared with the tax authorities as “hidden distribution of profits”. In this case, if the company falls short on liquidity, the shareholders should immediately finance the shortage to avoid eventual personal responsibility.