Please enable JS

VAT: What you need to know


VAT: What you need to know

In order to have an efficient, single market in Europe, a neutral and transparent turnover tax system was required, and that is how the VAT system came to be.

Value Added Tax or VAT in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies to most of those bought or sold for use or consumption in the EU.

Goods sold for export or services sold to customers abroad are usually not subject to VAT. However, imports are taxed in order to have a fair system. That allows EU producers to compete on the European market on equal terms with external suppliers.

Main aspects

The Value Added Tax is:

  1. a general tax that applies to all commercial activities involving the production and distribution of goods, as well as the provision of services.
  • Note that if the annual turnover of a person is less than a specific limit (the threshold), which is different for each Member State, they do not have to charge VAT on their sales.
  1. a consumption tax - it is borne ultimately by the final consumer, and it isn’t a charge on businesses.
  2. charged as a percentage of price.
  • The actual tax burden is visible at each stage in the production and distribution chain.
  1. collected fractionally via a system of partial payments: taxable persons (VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities.
  • That way the tax remains neutral regardless of the number of transactions.
  1. paid to the revenue authorities by the seller of the goods (who is the "taxable person"), but it is in fact paid by the buyer to the seller as part of the price.
  • This means it is an indirect tax.

VAT rates

According to EU law:

  1. The standard VAT rate must be at least 15%.
  2. The reduced rate must be at least 5%.

This applies only for supplies of goods and services referred to in a certain list.

Actual rates differ between EU countries and some types of products. Besides, a number of EU countries have retained other rates for specific products.

VAT in Bulgaria

In Bulgaria, the standard VAT rate is 20%.

Note that VAT registration is compulsory for all Bulgarian companies and tax liable persons who, within one financial year, produce VAT taxable sales in Bulgaria of 50,000 BGN or more (~ 26,000 euros). Those who record taxable sales below this limit can choose to register voluntarily.

If you need help with registration and more information, contact our Bulgarian lawyers. Danailova, Todorov and Partners Law Firm will assist you with any related matters and check whether you are entitled to any reduced rates or exemptions.

Do you need legal advice and assistance? Contact our experienced lawyers.

How is VAT charged?

The Value Added Tax on a sale is a percentage of the sale price. From this the taxable person deducts all the tax already paid at the preceding stage. This is done to avoid double taxation.

Tax is paid only on the value added at each stage of production and distribution. Thus, since the final price of the product is equal to the sum of the values added at each preceding stage, the final amount of VAT paid is the sum of the VAT paid at each stage.

Registered VAT traders receive a number. They have to show the Value Added Tax charged to customers on invoices. This mechanism allows the customer, if they are a registered trader, to know how much they can deduct in turn. Moreover, the consumer is aware of how much tax they have paid on the final product.

This system is somewhat self-policing, ensuring that the correct VAT is paid in stages.

VAT identification number

A VAT identification (or registration) number is the unique number that identifies a taxable person (business) or non-taxable legal entity that is registered for VAT.

The format of this type of number depends on the country, but each must begin with the code of the relevant country, followed by a block of digits or characters.

These identification numbers are important because they:

  • identify the tax status of the customer;
  • identify the place of taxation;
  • are mentioned on invoices (except simplified invoices in certain countries).

Most businesses and persons carrying out an economic activity need such a number.

They are obligated to register when they:

  • carry out the supply of goods or services taxed with VAT;
  • make an intra-EU acquisition of goods;
  • receive services for which they are liable to pay VAT;
  • supply services for which the customer is liable to pay VAT.

Each EU country issues its own national VAT number. Businesses supplying goods or services in several countries might have to get a number in each of them.

Note that only tax administrations have the right to issue a VAT number.

If you need to check whether a certain number is valid, you can do so on the website of the European Commission.

Conclusion

The application of VAT is regulated by national tax authorities but there are some standard EU rules. This tax system is different from the one in the United States.


If you need a consultation with a good tax lawyer in Bulgaria, contact us. We can help you with all kinds of legal matters.

SEND US YOUR INQUIRY