The increase in the dividend tax is yet another incentive for the gray economy

The announced increase in the dividend tax from 5% to 10% in 2026 will not only fail to reduce the share of the shadow economy in Bulgaria, as is the advertised desired effect of the measure, but will have the opposite effect and will "hit" ordinary people and investors, forcing some entrepreneurs to start avoiding paying it. The proposed increase was first announced over the weekend by Dragomir Stoynev, Deputy Speaker of the National Assembly and Chair of the BSP-United Left parliamentary group.

We have such an attitude (editor's note: towards increasing the tax) in the Joint Management Council," he said in an interview with BNR.

He then added that the aim is to curb the grey economy because, according to him, the low tax fills "black coffers" with high cash reserves. However, the business community believes that raising the tax will not help solve the problem, but on the contrary, will make it worse, as it will encourage entrepreneurs to start evading taxes.

In a comment for Economic.bg, Dobromir Ivanov, executive director of the Bulgarian Enterprise Association (BESCO), said that the main victims will be young people who invest in the stock market, as well as investors in companies. According to him, these are people who had money left over from their salaries and decided to invest it on the stock market, but instead, they will be hit hard.

Separately, the proposed increase will cause entrepreneurs to look for ways to circumvent the tax. "Business owners may set higher salaries for themselves and pay only 10% "total income" tax, thereby withdrawing profits. A bonus could be set at the end of the year, or a company could be set up in another country from which to withdraw profits, because in Malta, Estonia, and Latvia, this tax is 0%," he explained.

The measure will in no way lead to the effect they expect to see. There are thousands of other ways to circumvent this tax and make it cheaper," Ivanov added.

He commented that the proposal shows "a great ignorance of the Bulgarian national psyche" and that if the state is looking for higher tax collection, it must improve the business environment, conditions, and services it provides, as well as the functioning of its institutions.

According to Ivanov, the ultimate effect of the measure will be:

• Lower tax collection;
• Lower activity on the Bulgarian stock exchange;
• Even less investment;
• An incentive to hide money and even more grey economy;
• An incentive to transfer profits abroad and to countries with better conditions, including Malta, Estonia, and Latvia, where there is no such tax.

The chief economist of the Institute for Market Economics (IME) Lachezar Bogdanov, commented to BNR that this increase will not affect many people, but if the current government gets away with these two minor changes to the tax system—despite earlier promises not to make such changes—after two years of similar policies, the cabinet will not be able to avoid public discontent.

What is the real contribution of dividends to the budget?

In order to choose to increase this particular tax, the Ministry of Finance (MF) has clearly seen some unrealized potential for more revenue. Economic.bg checked the dividend income for 2024. It turns out that it amounts to only BGN 125 million for the whole year. This amount is BGN 33.5 million, or 36.6% more than what was collected in 2023, and includes revenue from tax on dividends, liquidation shares, and income of local and foreign legal entities.

Revenues from this tax depend on the state of the economy and the decisions made by companies on the distribution of dividends," the Ministry of Finance said in its bulletin.

We would like to remind you that in 2024, the Bulgarian economy surprised with significantly higher economic growth than expected, which was revised by the National Statistical Institute (NSI) a few weeks ago from 2.8% to 3.4%. However, a number of economists and experts warn that this result is "artificial," inflated by strong domestic consumption, which in turn is supported by continuing wage increases in the public sector, for which the country is incurring debt after debt.

Expectations for 2026, when our country will officially become the 21st member of the eurozone, are for slower wage growth, which will inevitably affect consumption.

Trade union pressure

This is not the first time that the introduction of a higher tax on dividends has been discussed.

At its conference in early October, the KNSB also proposed an increase, but instead of 10%, they proposed as much as 15%. According to the trade unionists, the combination of a 15% dividend tax and a 15% corporate tax (instead of the current 10%) "will lead to a significant reduction in the financial incentive to evade social security contributions."

A study by the union showed that Bulgaria has one of the lowest dividend rates in the European Union (EU), where the average level is 21%.

According to data from the non-governmental research organization Tax Foundation Europe, the leaders in Europe in terms of dividend tax rates are Ireland, Denmark, the United Kingdom, Norway, and France, where it varies between 34 and 51 percent. Bulgaria is in the bottom six of the ranking, along with Greece and Georgia, where the dividend tax is also 5%. If it rises to 10% in 2026, this will put us in 10th place, along with Slovakia (10%).

Translated with DeepL.