Hidden Profit Distribution vs Dividends in Bulgaria 💼
Many company owners in Bulgaria struggle to understand the difference between dividends and hidden profit distribution. Although both involve the company’s profit, the way they are declared and taxed makes a huge difference. Knowing how to distinguish them can protect your business from tax audits and penalties. That’s why T&G Consulting helps entrepreneurs maintain compliance and manage their finances transparently.
What Are Dividends? 📈
Dividends are the official and legal way for a company to distribute its profit among shareholders. They are declared after the annual financial statements are submitted and the corporate income tax is paid. In Bulgaria, the general meeting of shareholders must approve the dividend payment, ensuring full transparency and accountability.
- Dividends are paid only from the company’s net profit.
- They require a formal decision by the general meeting.
- A 5% dividend tax applies to each shareholder.
When dividends are declared properly, they create a clear and legal trail in accounting records. This not only ensures compliance but also demonstrates trustworthiness before regulators and investors. Dividends are the most transparent and risk-free way to reward business owners. 💰
What Is Hidden Profit Distribution? ⚠️
Hidden profit distribution occurs when a company’s resources or assets are used for personal benefit without being officially declared as dividends. Essentially, it’s an attempt to extract value from the business without proper reporting. Such actions violate tax regulations and can lead to serious consequences.
Common examples include:
- Paying personal or household expenses with company funds.
- Selling company assets to owners or related parties below market price.
- Paying inflated consulting fees or salaries to related individuals.
- Using company property, such as cars or real estate, for private use without accounting adjustments.
If the National Revenue Agency (NRA) identifies such practices, it can reclassify these payments as hidden profit distribution. This results in:
- Adding the amount back to taxable profit (subject to 10% corporate tax).
- Applying a 5% dividend tax as if profits were distributed legally.
- Imposing additional interest, penalties, and potential audits.
These actions not only increase financial costs but also damage your company’s reputation and credibility with partners and banks. Once the NRA flags a business for irregularities, follow-up inspections are almost inevitable.
Comparison: Dividends vs Hidden Profit Distribution
| Aspect | Dividends | Hidden Profit Distribution |
|---|---|---|
| Legal status | Fully legal and regulated | Considered tax evasion |
| Approval | By general meeting of shareholders | Unapproved or disguised |
| Tax rate | 5% dividend tax | 10% corporate + 5% dividend + fines |
| Documentation | Transparent accounting records | Hidden or misclassified transactions |
| Risk | Low, fully compliant | High – may trigger audits and penalties |
How to Stay Compliant ✅
To remain compliant, keep a strict separation between personal and corporate finances. Every transaction should have a clear business justification and supporting documentation. Before making payments that might be considered personal or non-operational, consult your accountant or tax advisor. T&G Consulting provides expert guidance to prevent reclassification of expenses and protect your company from unwanted scrutiny.
The difference between dividends and hidden profit distribution goes far beyond terminology — it determines whether your company operates lawfully. Proper accounting, transparent reporting, and timely consultation can save significant amounts of money and stress. Partner with T&G Consulting to plan your profit distribution wisely, stay compliant with Bulgarian tax law, and protect your business reputation. 🌍
👉 For useful and interesting information, visit the channel of our partners!