Bulgaria has made a name for itself as one of the top outsourcing destinations in Europe. The quality of local employees and their fluency in languages also rates the country amongst the best locations globally for establishing outsourcing centres.
The relatively low costs for maintaining an office in Bulgaria and favourable salaries are well known and appreciated. Employees working in Bulgaria’s outsourcing industry (particularly the IT sector) afford a quality of life well above the average, and thanks to low everyday living costs, the country also attracts non-EU citizens (Ukraine, Macedonia, Serbia and from elsewhere).
A new trend in outsourcing
Outsourcing is quite a significant part of the actual operations of many international companies that consequently have sizeable hubs and centres in Bulgaria. Other companies elect to outsource internal functions on a cost-plus basis where the local entity works as a separate enterprise. These companies do business in Bulgaria through their business centres and offices, and this business leads to the set-up of local branches and entities; these are involved in core business functions.
Another trend has now emerged. Companies are externally sourcing (or considering to in the near future) internal administrative functions that are supporting their core businesses, but without registering a branch or an entity in Bulgaria.
For example: the foreign entity is setting up an office but has no place of business in Bulgaria. It is also becoming more common to hire local personnel without establishing an office. Such non-establishment presence is legally acceptable providing the personnel hired in Bulgaria are not involved in the core business operations of the foreign entity. Rather, they should have supportive administrative functions, and they should also be small in terms of total employee numbers.
This approach provides opportunities for even small and medium-sized enterprises looking to decrease some of their costs without negatively affecting the quality of any work.
TMF Bulgaria is pleased to see these foreign companies (many from the UK) are satisfied with the offices they have established in Bulgaria. After testing the environment with one or two employees they often grow to around 20 employees within a couple of years. The staff hired in Bulgaria provide the foreign business with the remote support that would have otherwise been provided in its country of establishment; just at a lower cost.
Considerations for outsourcing administrative functions
In these supportive, administrative-only circumstances, the only registration companies must complete in Bulgaria is as an employer. This simple process allows them to hire staff under Bulgarian labour agreements, and to further act as an employer by paying the monthly social and health security instalments as well as salary taxes.
If at some point a decision to close the local admin/support office is made, the procedure to effect this is not as burdensome as it would have been if a separate legal entity or a branch was registered with the local trade register.
Registration as an employer should not trigger corporate taxation as the companies’ presence in Bulgaria is not related to the core business of the entity, instead it’s related to the provision of supportive functions to the foreign entity’s business (mainly backing the companies in their day-to-day administrative work). These functions are essential for the correct performance of business tasks, but are not the business itself.
In order to make sure that this requirement is met and that corporate tax is not in fact due in Bulgaria, it is of course best to seek tax advice before setting up an office.
There is no obligation for appointment of a local representative guaranteeing the entity’s compliance with the local social security rules, it is always the entity (being registered as employer) that is responsible for the declaration and payment of social security contributions and employees’ taxes related to the labour relationships. This is why – also considering the specifics of local payroll legislation and the fact that all reports should be in Bulgarian – we do suggest that foreign employers hiring in Bulgaria make use of a professional services provider, supporting the employer in the payroll process.