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Hidden Profit Distribution vs Dividends in Bulgaria | 2025 Accounting Guide
This article explains a topic that often confuses company owners: the difference between dividends and hidden profit distribution. Understanding this can help you avoid serious tax risks and plan profit allocation correctly.
What Are Dividends?
Dividends are the official and legal way for a company to distribute profits to its shareholders. They are declared after the company submits its annual financial statements and pays its corporate tax obligations.
- Declared by a General Meeting decision and paid from net profit.
- Shareholders in Bulgaria pay a 5% dividend tax.
- All transactions are transparent and legally documented.
Dividends represent the clean, compliant way to reward company owners while maintaining a clear tax trail.
What Is Hidden Profit Distribution?
Hidden profit distribution occurs when a company’s funds or assets are used for personal benefit, without declaring them as dividends. The law treats this as an attempt to extract profit informally.
Typical examples include:
- Covering personal expenses through the company’s accounts.
- Selling company assets to owners or related parties at prices below market value.
- Paying unusually high fees or salaries to related parties without business justification.
When tax authorities discover such transactions, they can reclassify them as hidden profit distribution, triggering tax adjustments and penalties.
Comparison: Dividends vs Hidden Profit Distribution
| Aspect | Dividends | Hidden Profit Distribution |
|---|---|---|
| Legal status | Fully legal and regulated | Considered tax evasion |
| Approval | By shareholders’ meeting | Unapproved or disguised |
| Tax rate | 5% dividend tax | 10% corporate + 5% dividend + penalties |
| Documentation | Official accounting records | Hidden or misclassified transactions |
| Risk | Low, compliant | High – may trigger audits and fines |
Tax Consequences and Compliance
If the National Revenue Agency (NRA) reclassifies an expense as hidden profit distribution, two things happen:
- The expense is disallowed and added back to the company’s taxable profit (10% corporate tax applies).
- The amount is also subject to 5% dividend tax, plus interest and possible administrative fines.
In addition to financial penalties, such cases often lead to audits and can harm your company’s reputation with regulators and partners.
How to Stay Compliant
To avoid reclassification, always document transactions carefully and keep a clear line between company and personal finances. Before making payments or using company funds for non-business purposes, consult your accountant or tax advisor. Proper planning and documentation save far more than the taxes you might try to avoid.
Key Takeaways
- Dividends are legal, transparent, and taxed at 5%.
- Hidden profit distributions are risky and can result in additional taxes and penalties.
- Good accounting practices protect your business and reputation.
We help businesses stay compliant, minimize tax risks, and plan profit distribution effectively.
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