In personal finance management, income that is not related to work and time investment is perceived as passive. Passive income is revenue that is earned with minimal or no active involvement from the person receiving it. It can be generated through investments, rental properties, royalties, and more. Any source that continues to generate income after the work has ceased can be considered passive. These earnings are not included in the insurable income and are not subject to contributions under the Social Insurance Code (SSC). However, they are subject to personal income tax.

 

Income from Rental and Transfer of Property Rights

In Bulgaria, a popular source of passive income is renting out movable property (e.g. a vehicle, a machine) or real estate (e.g. an apartment, office, commercial space). Often, inherited apartments are rented out or properties are acquired specifically for investment purposes. Property rental can serve both residential and business needs, with tenants being either individuals or legal entities. If the tenant is a legal entity or a self-employed person, they are obligated – before paying the rent due - to withhold an advance tax and transfer it to the account of the National Revenue Agency (NRA). For example, if the monthly rent is 1,000 euros, the tenant will withhold 90 euros in tax from the landlord and transfer 910 euros in rent.

If the tenant is a natural person, the advance tax due will be paid by the landlord. In other words, the tenant will pay the full rent of 1,000 euros to the landlord, who will then personally remit the 90 euros tax due to the NRA.

Renting out property is usually associated with a number of accompanying expenses - repairs, replacement of furniture, appliance maintenance, broker commissions, covering bills left unpaid by irresponsible tenants, etc. That is why the Personal Income Tax Act (PITA) provides that, before taxation, 10% of the gross income received may be deducted as legally recognised expenses (LRE). Using the example above, for a monthly rent of €1,000, tax is paid on 900 euros. The tax rate is 10%, which is why the calculated tax above amounts to 90 euros.

If one wishes to assess the actual return from renting out a property, they must take all these factors into account. Additionally, if the property is financed through a mortgage loan, the interest paid to the lender should also be included.

Over time, properties may also generate capital gains – an increase in their market value. However, this is not guaranteed – for example, a property purchased in early 2008 yielded a negative capital return over a 10-year period.

The following types of income, acquired during the year from the sale or exchange of property, are non-taxable:

•        one residential real estate property, if more than three years have passed between the date of acquisition and the date of sale or exchange

•        up to two real estate properties, as well as agricultural and forest land regardless of quantity, if more than five years have passed between the date of acquisition and the date of sale or exchange.

When selling property, the manner in which it was acquired is also important. Income from the sale or exchange of property acquired through inheritance or bequest (legacy), as well as property restituted under the provisions of a legal act, is exempt from taxation.

 

Income from Copyright and Licensing Royalties

Copyright and licensing royalties may be received by individuals working in the fields of art, science, and culture. These include, for example, authors, composers, musicians, painters, software developers, photographers, inventors, and so on. Such activities often accompany the work of educators as well - both in secondary and higher education. If these individuals have created a work over which they hold copyright, as regulated by the Copyright and Neighbouring Rights Act, they may assign or sell these rights and receive income from them.

These incomes are passive, as they are distinct from earnings related to labour (when the product itself is created – for example, a text, photograph, music, software). Social insurance contributions are due for the labour performed, but not for the assigned right. This is because, when creating a work (such as a book), the author does not know whether it will generate any income. If they decide to monetize the work – which may happen much later, even decades later – then it will begin to generate income. If the creator possesses unique qualities and the work is brilliant, it cannot be equated with the physical labour invested, and so on (a written book may be published and sold for many years).

When declaring income from assigned copyright, 40% legally recognised expenses are applied. That is, if the author has received 10,000 euros in copyright royalties, they will pay tax only on 6,000 euros. This reflects the state's effort to encourage artistic and cultural works, as well as the development of innovation and scientific-technological progress.

 

Income from Financial Instruments

Income from financial instruments can take different forms – interest received, dividends distributed, profit from sale at a price higher than the purchase one. Here again, there are a number of peculiarities depending on the instruments owned and traded, as well as the type of income that is realised through them. For example, profits from trading shares on regulated markets in the European Union or the European Economic Area are not taxed.

If you own shares or equity in companies and receive dividends from them, a 5% tax will be withheld by the accountant before the dividend is paid out to you.

 

Tax-exempt Income

There are a number of tax-exempt incomes. However, people have an incentive to declare them, since they can prove their income – for example, to a creditor or to prove the source of funds with which they acquired property. Some of them are: scholarships for studies, some state and national awards, income from rent or lease, consumer dividends from cooperatives, business travel, insurance benefits, benefits under various laws, etc.

To be sure whether a particular income is subject to taxation and what tax you owe, consult the Personal Income Tax Act (PITA). You can also visit the Ministry of Finance website for information on personal income taxes. On the National Revenue Agency’s website, under the sections on taxes and social insurance contributions, as well as in the Q&A section, you will find answers to various questions related to the taxation of different types of passive income.

 

Useful links:

National Revenue Agency

Personal Income Taxes

Personal Income Tax Act

Copyright and Neighbouring Rights Act