What is VAT and when do we have to register for mandatory VAT?

Wondering what VAT is? Value added tax (VAT) is a key element of the tax system in Bulgaria and the European Union. Understanding its nature and the requirements for registration under the VAT Act (VAT Act) is essential for anyone carrying out independent economic activity.

What is Taxation?

Taxation is the process of imposing taxes on income, profits, or consumption to finance the state budget. It is the primary mechanism through which the government secures funds for public services such as healthcare, education, social security, infrastructure, and security.

Depending on the tax system and the principles governing it, taxation can be direct or indirect:

• Direct taxation – affects the income and profits of individuals and legal entities. The most common examples include personal income tax (PIT) and corporate profit tax.
• Indirect taxation – applies to taxes levied on the consumption of goods and services, such as value-added tax (VAT) and excise duties.

n the context of VAT, taxation with this tax involves applying a specific percentage to the value of goods and services, with the tax burden being passed on to the final consumer. In this case, businesses act as intermediaries – they collect and remit the tax to the state budget.

Taxation is not only a revenue-collection tool but also a means of economic regulation. Through different tax rates, exemptions, and reliefs, the government can encourage or restrict certain economic activities, support small and medium-sized enterprises, or influence consumer behavior.

What is VAT?

Value-added tax (VAT) is neutral in nature because it does not constitute a business expense but is instead passed on to the final consumer. Companies registered under the VAT Act act as intermediaries between the state and consumers – they charge VAT on their sales, collect the tax, and then remit it to the budget.

What is Tax Credit?

The tax credit is a key mechanism in the VAT system that prevents multiple taxation along the supply chain. When a VAT-registered entity purchases goods or services, VAT is charged on them, which can be recovered by deducting it from the amount of VAT charged on subsequent sales.

To qualify for a tax credit, several conditions must be met:

• The goods or services must be used for a taxable economic activity.
• The supplier must be a VAT-registered entity and must issue a tax invoice containing all mandatory details.
• The invoices must be accounted for in the relevant tax period.
• If a company has more input VAT (on received supplies) than output VAT (on sales), it can request a refund of the difference or carry it forward for deduction in a future period.

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When is VAT Registration Mandatory?

Registration under the Value Added Tax Act (VAT Act) is mandatory for individuals and entities engaged in independent economic activities that meet certain criteria. This applies to both natural persons (such as self-employed individuals and freelancers) and legal entities, including business organizations such as sole proprietorships, limited liability companies, and others.

Key Cases of Mandatory VAT Registration:

Reaching a taxable turnover exceeding BGN 166,000 over the last 12 months

• If this threshold is reached or exceeded within any consecutive 12-month period (not necessarily a calendar year), the entity is required to submit a registration application within seven days.
• When calculating the turnover, only taxable supplies are considered, while exempt transactions and non-taxable supplies are excluded.

Providing Services to Clients in the EU (Article 97a of the VAT Act)

• When providing services to companies or individuals registered for VAT in an EU member state, VAT registration is mandatory, regardless of turnover.

• In this case, VAT is not charged on the invoiced services, but VIES declarations must be submitted.

• Registration must be completed before conducting the first taxable transaction with an EU client.

Receiving Services from VAT-Registered Suppliers in the EU (Article 97a of the VAT Act)

• If an entity receives services from companies registered for VAT in another EU member state (e.g., purchasing software, advertising on social networks like Facebook and Google, hosting services, etc.), VAT registration is mandatory, regardless of turnover.

Intra-Community Acquisitions (Article 99 of the VAT Act)

• For purchasing goods worth over BGN 20,000 within a calendar year from an EU country, VAT registration is required to properly account for the transaction.

Other Grounds for Mandatory VAT Registration:

• In case of company transformation or certain real estate transactions – VAT registration may be required depending on the specifics of the transaction.
• Engaging in activities subject to mandatory registration – This includes specific sectors such as e-commerce with individual consumers in the EU, where registration is necessary if certain thresholds under the OSS (One Stop Shop) system are exceeded.

Is Voluntary VAT Registration Possible and Does It Make Sense?

VAT registration under the VAT Act is not only mandatory in certain cases but can also be done voluntarily, even if the legally defined turnover threshold has not been reached. In some situations, this can be a strategic decision with potential financial and operational benefits.

When Can Voluntary Registration Be Advantageous?

Working with VAT-registered clients

• If a company’s main clients are VAT-registered businesses, they can deduct the VAT charged as a tax credit.
• Including VAT in the final price will not increase costs for these clients and will not be an obstacle to cooperation.
• Some companies prefer working only with VAT-registered suppliers to simplify their accounting and optimize tax planning.

Expenses for goods and services with VAT

• When purchasing materials, equipment, or services subject to VAT, registration allows for the recovery of paid VAT or its deduction from VAT payable on sales.
• This can significantly reduce real costs, especially in cases of large initial investments or businesses with high operating expenses.

Conducting business with international clients

• If a business sells services to companies in the EU, registration under Article 97a of the VAT Act allows it to avoid charging Bulgarian VAT, but requires the submission of VIES declarations.
• If goods are purchased from EU countries, VAT registration enables the use of the reverse charge mechanism, preventing additional tax burdens.

VAT registration procedure

VAT registration is an administrative procedure carried out by submitting an application to the National Revenue Agency (NRA). Depending on the grounds for registration, the process may have specific requirements, but the main steps are as follows:

1. Submission of the Registration Application

• The application is submitted using the official form (Annex No. 1 to the VAT Regulations) at the territorial directorate of the NRA based on the entity’s registered address.
• It can be submitted electronically via the NRA’s system using a qualified electronic signature (QES) or in person at an NRA office.
• The application must state the reason for registration (mandatory or voluntary).

2. Supporting Documents

Various documents must be attached to the registration application, depending on the specific case. These usually include:

• Statement of taxable turnover (for registration based on turnover).
• Contracts, invoices, or other evidence of business activity.
• For services or purchases from the EU – documents proving the receipt or provision of services.
• The NRA may request additional information or supporting evidence if necessary.

3. NRA Verification

Once the application is submitted, the NRA conducts a verification process, which may include:

• Analysis of turnover and accounting documents.
• Checking for outstanding tax liabilities.
• On-site inspection of the registered address (in certain cases).

4. Issuance of a VAT Registration Certificate

If all requirements are met, the NRA issues a VAT registration certificate within 7 days of application submission. This document includes the entity’s VAT identification number (BG+UIC/PNF for companies and individuals, respectively).

5. Activation of the Registration

VAT registration becomes effective from the date specified in the registration certificate. From that moment on, the entity is required to:

• Charge VAT on its sales.
• Issue VAT invoices.
• Maintain purchase and sales ledgers.
• Submit monthly VAT returns and VIES declarations (if conducting transactions within the EU).

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Refusal and Termination of VAT Registration

Refusal of VAT Registration by the NRA

The National Revenue Agency (NRA) has the right to refuse VAT registration if the legal requirements are not met. The reasons for refusal may include:

• Lack of actual economic activity – If there is insufficient evidence that the applicant is carrying out taxable transactions.
• Falsely declared turnover – If the NRA determines that the declared BGN 166,000 turnover has not been reached or cannot be substantiated with documents.
• Outstanding tax liabilities – If the applicant has unpaid taxes or social security contributions, this may lead to a refusal.
• Risk of tax fraud – If the NRA suspects that the registration is being requested for fraudulent purposes, such as participating in VAT refund schemes.

If the NRA issues a registration refusal, the applicant has the right to appeal within 14 days to the director of the relevant NRA territorial directorate. If the refusal is upheld, it can be further challenged before the Administrative Court.

Voluntary Termination of VAT Registration

A VAT-registered entity can apply for deregistration in the following cases:

• Turnover falls below BGN 166,000 – If the entity’s turnover over the last 12 months is below the mandatory registration threshold, it may request deregistration.
• Voluntary business closure – If the entity has ceased operations or no longer engages in taxable transactions.
• Change in business model – For example, if the entity shifts to VAT-exempt activities.

Conclusion

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Author

Ася / Asya

is a certified accountant from Varna with extensive experience in supporting freelancers and startups. In her work, she strives to provide practical solutions to complex accounting issues.

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