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Noncommercial organizations activity economic impact study for the period 1991-2001 in Bulgaria

Authors

Maria Jecheva
Plamen Kaloianchev
Todor Todorov

Content
Introduction
Part one. Noncommercial organizations
I.1. Essence and types of noncommercial organizations (NCO)
I.2. Indicators for measuring the activity of NCO
Part two . Development of NCO in Bulgaria trough the 90s
II.1. Production and add value
II.2. Occupation and salary
II.3. Incomes and expenditures of the NCO for the period 1998-2000
Part tree. Tax treatment of NCO
Conclusion
Attachments
Bibliography

Used abbreviations
NSI – National Statistic Institute
NPO – nonprofit organizations
NCO – noncommercial organizations
GDP – gross domestic product
SNA – system of national accounts
EU – European Union
NPLE – nonprofit legal entities
NPLEA – Nonprofit Legal Entity Act

1

Introduction
The solution of social problems requires joint efforts by the government and third
sector. The non-profit organizations are valuab le means for achievement of state policy
goals (poverty fight
1, development of the civil societ y, protection of historical and
cultural heritage, etc.). This imposes the necessity of their separation from economic
point of view and a special s upport for their activity. As long as the greater part of the
resources of nonprofit organizationd are gained through the form of donations, the
encouragement of charitable activities is pointed as the main motive
2 for providing them
with a privileged status. Most often this status means direct budget subsidies or tax
exemptions, i.e. the tax treatment of non-profit organizations represents an instrument for
the economic policy goals achievement. At the same time, the tax exemptions are given
also to the rest of the economic s ubjects in their virtue of donors.
The privileges, which the non-profit organiza tions are given, lead to redistribution
in their favor of limited social resources. This imposes the clear understanding of the
effect of each measure and the society’s gain from the activity of nonprofit organizations.
From statistical point of view , the indicators of the sector’s importance and efficiency
traditionally undervalue its role, because they do not take into consideration the existence
of positive outside effects, which results fr om the execution of most of the non-profit
organizations’ projects. The sector’s developmen t is directly related with the civil society
strengthening, which is one of the most im portant requirements for the EU applicant
countries. Non-profit organizations are effective when delivering different services; they
are less bureaucratic with regard to the public sector, gain additional support from society
in the form of donations or voluntary work.
Many organizations, whose functions and tasks are targeting establishment of
civil society values have been created in th e last ten years in Bulgaria. Most of these
organizations are established to perform ch aritable, social, cultural, educational,
scientific, religious and othe r activities. By status they are very diverse – foundations,
associations, unions, sport un ions, political parties, economic ch ambers, religious
organizations and so on. The legal acts, which regulate their activities, are the Non-profit
Legal Entities Act, the Law on Political Partie s, the Law on People’s Chitalishta , etc.
The presentanalysis is made upon the request of the “Bulgarian Center For Not-
for-profit Law” Foundation. The res earch has two main objectives:
first to analyze the
activity of noncommercial enti ties and to value their place and importance for the
development of Bulgarian economy in the period 1991-2001 and
second to research the
tax treatment of non-profit organizations and the effect of a favorable regime of their
taxation on the consolidated state budget.
The research comprises ofthree main parts. In the first one is taken into
consideration the nature of noncommercial organizations, a classification of the
noncommercial organizations is made on the basis of their institutional affiliation and
1 The great inequalities in the incomes and the employment possibilities may be a serious impediment to
the economic growth and well-being.
2 See “General Explanations of th e Administration’s Fiscal Year 2001 Revenue Proposals”, p. 103 and
“General Explanations of the Administration’ s Fiscal Year 2002 Tax Relief Proposals”, р. 6.

2

economical activity. The methodical nature of indicators, which measure their activity,
has been clarified. Defined are some of the problems, encountered with regard to the
existing information on noncommercial organiza tions. In part two follows the sector’s
development in the period 1991-2001 through the prism of the main macroeconomic
indicators. The employment in the sector in the period of 1998 – 200 1 is analyzed, as
well as the income and expenses structure of these organizations on the basis of their
income and expenses reports. This is the base, on which in the third part of the research is
examined the tax treatment of nonprofit or ganizations. The effect of some of the
proposals for legislative amendm ents in the Bulgarian legislation with respect to the
taxation of nonprofit organizati ons on the country’s economy and mainly on the state
budget is made as the calculations are set in a special application. This order and the
relatedness of the research as well as the trustworthy information sources presuppose the
reliability of the results reached.
A main information source is the datafrom the National Statistic Institute (NSI)
and the Ministry of Finance. Also used are the officially published data of the NSI and
some aggregations of original data, ma de especially for the present study. The
consolidated state budget is the primary information basis, which is used for evaluation of
the effect of NPO activities and the legi slation amendments on the public finances
situation.
In the study, the notions noncommercial and non-profitmaking organizations are
used as synonymous. The notion nonprofit organi zations is used in a narrower sense, as
the transition from the aggreg ation of noncommercial organizations towards non-profit
ones is clarified in part one, section I.1.

Part one. Noncommercial organizations
I.1. Nature and types of noncommercial organizations
The system of national accounts (SNA 93 and ЕSS 95) defines noncommercial
(non-profitmaking) institutions as juridical units, established with the aim of goods and
services production, whose status does not allo w them to be a source of income or other
financial profit for those, who establish, control or fund them
3. In practice their activity
generates surpluses or deficits , but other institutional units cannot absorb the surpluses.
Due to this reason they are often exempt ed from different taxes. The notion “non-
profitmaking” does not mean that none of th e noncommercial organizations cannot have
an operating surplus from its activity, but do comes from the fact that, the members of
these organizations, who control the NCO are not allowed to gain profit from the NCO
activity.
The following scheme shows the systematization of NCO from the economic
institutional structure point of view .

3 System of National Accounts, 1993, p. 94

3

Non-commercial organizations (NCO)
Non-commercial organizations (NCO)

NCO, servicing the business and/or
households and
classified to the “State governance” sector

NCO, servicing
“Households” sector
structured in a
separate institutional
sector in SNA
Non-market non-commercial organizations Market non-commercial organizations
NCO, servicing the
business and classified to the corporative
sector

NCOs are divided into market and non- market producers. The NCO – market
producers provide goods and se rvices to other institutional units at economically
important prices, i.e. prices which have an important influe nce over the quality, which the
producer wants to offer and the quantit y that the buyer wants to buy. Schools,
universities, hospitals are market NCO, when they charge fees, which are based on their
production expenses and which are high enough to influence the search of their services.
While performing their activity the market NCO should generate operating surplus or
loss. Each surplus that they generate shou ld stay inside the institutions, because their
status forbids them to distribute it among other institutions.
Most market NCOs, servicing business, are created by business associations and
are funded by them. Examples of market NC Os, servicing businesses and classified
towards the corporate sector are the commer cial chambers, agricultural or commercial
associations, research labs and other organiza tions or institutions, performing activity that
is profiting the business, which controls and funds them. When NCOs are business
servicing (for example commercial chambers and other organizations ), but are controlled
and financed primary by state, then they are classified as non-market NCOs and are
directed towards the state governed sector.
4

The greater part of NCOs are non-market producers. They are producers, which
provide their production free or at ec onomically insignificant prices or fees 4. Therefore,
in order to cover thei r activity expenses, non-market NCOs rely on other sources such as
membership fees and transfers fr om other economy sectors.
From the point of view of the ins titutional structure in the economy, the non-
market institutions are divided into two pa rts – ones that are controlled and financed
primarily by the Government and service the business and/or households and others,
providing not-market services and goods to households, financed primarily by transfers
from non-government sources – households, co rporations or from foreign sector.
Examples for NCOs, classified in the governmental sector are NCOs, which are engaged
with researches and are benefiting groups of producers or such NCOs, functioning in the
healthcare, ecology, education and other sphe res and are of benefit not only to the
manufactures, but also to the population. Th e Government may create such NCOs, and
they are part of the government management sector, although they are benefiting some
other institutional sectors.
The rest of the NCOs are united in a sepa rate sector in the system of national
accounts – noncommercial organizations, servic ing households. These are NCOs such as
professional unions, political parties, consumers associations, religious communities and
social or sports clubs. Not included here ar e organizations with similar functions, but
controlled and financed primarily by th e Government,. Other NCOs, servicing
households, provide services or goods to the households at non-market prices in case of
natural disasters or war. The incomes of th ese NCOs are gained generally on the base of
donations in cash or in-kind provided by the co mmunity, corporations or the Government
and from foreign sources.
For systematization of NCOs from the poi nt of view of their performed activity,
in the NSI practice is used the National Bran ch Classification (NBC 98). It is compatible
with the branches classificat ion and economic activities, adopted in the EU member-
states and applicant-states. Up to 1997 fo r branch economic grouping has been used the
branch classification of activities (BCA), which structures the production sphere
according to the methodology of the materi al product system. This creates some
difficulties when connecting data in dynamic lin es and analysis, especially at the lower
levels of aggregation of the functions a nd activities of non-profitmaking institutions.
For the period from 1998 to 2000 NCOs are classified into the following
activities’ groups:
1. Business organizations and employers’ organizations – NCOs, focused on the
development of a specific business or to wards economic and social development
of a particular region su ch as the Branch union of leather, fur, shoe and
haberdashery industry, Federation of bread bakers and confectioners in Bulgaria,
Association of Bulgarian factories for international transportation, Agency for
small and medium entrepreneur assist ance, Association of Bulgarian Book
publishers, Bulgarian artisans chamber, Association of Bulgarian insurers;
4 In the sense that they do not have sufficient influence over the quantity, which the producer wants to sell
and over the quantity, the buyer wants to buy.
5

2. Professional unions and organizations – organizations, whose members have
similar interests in a professional-technical sphere or practice similar professions
such as: the Union of Architects in Bulgaria, Scientists’ Union in Bulgaria,
Chemists’ Union in Bulgaria, Pharmaceu tical Union – Sofia, Interpreters’
Association, Union of mathematicians in Bulgaria, Union of the independent auto
– technical experts in Bulgaria, Union of meteorologists in Bulgaria;
3. Creative unions – clubs and unions of culture and art activitists: writers, artists,
painters, movie-makers, TV and radio – work ers, journalists and etc. as: Union of
national arts masters, Association “W orld and music”, Union of Bulgarian
composers, Union of Bulgarian movie wo rkers, Union of Bulgarian painters,
Association of Bulgarian writers, Bulgarian Association for theatre;
4. Associations of cooperative organizat ions – association among co-operatives
that are not targeting profit for performa nce of the common policy, in relation to
market, labor salary, social policy such as: National Un ion of labor-productive co-
operatives, Central Union of co-operatives of handicapped;
5. Syndicate organizations – organizations of hired employees, which protect their
interests in the sphere of labor real ization and labor salary as: Syndicate
Federation “Metalitzi”, Syndicate of Bulgarian teachers, Federation of
independent syndicates of minors, Labor Confederation “Podkrepa”, Union
“Promiana”;
6. Other NCOs – foundations, associations , clubs, interests societies, related
primarily with distribution of sources, products and providing services without
profit; fundraising for charitable aims; esta blishment of social contacts; protection
of a particular interests of groups of pe ople; organization of educative activities.
In this group are Foundation “Democ racy”, Foundation “St. Kiril and
Methodius”, Foundation “Vasil Levski”, Foundation “Public Fund Childhood”,
“Bulgarian Red Cross”, Association “Cen ter for social practices”, Independent
association “Green patrols”;
7. Political organizations – political organizations and their associated
organizations – for example: politic al parties’ youth organizations;
8. Religious organizations such as: the Bulgarian Patriarchy, Union of Seventh
day Adventists churches, United God chur ch, Church of Seventh day Adventists,
Armenian Evangelists Church;
9. Chitalishte.
In addition to the above mentioned NC Os are registered in the following
activities, which by rule, are pe rformed also by commercial entit ies in the market sphere:
10. Academic studies – fundamental a nd applicable scientific studies,
experimental researches in the sphe re of medical science and public and
humanitarian science;
11. Education – higher education, out-of- class activity for children and youth,
professional qualification and requalific ation of adults. In this group are

6

Association “New Bulgarian University”, association “American University in
Bulgaria”, Center for human resources development;
12. Human healthcare and social services – “Mother and child” homes, social
patronage and social care centers, provi ding accommodation, activities related to
providing food and services to elderly and physically and mentally disabled and
vulnerable people, family and children related consultations, adoption issues
inclusive, professional orientation and di splacement of disabled and vulnerable
people, selection in connection to provi ding financial and in kind help; for
example Association SOS – child villages Bulgaria;
13. Culture, art, science – technical information and documentation – theatric,
music and artistic activit y, protection and restorati on of cultural monuments,
library activity; Association “Theatre Flower”, Association “Antract”;
14. Physical and sports activity. Tourist association “Aleko Konstantinov”, Riding
club – Boyana, Bulgarian School union “Una k”, Sports club “Academicus”, Sport
Dances Club “Mladost”, Y acht Club – port Burgas.
The analysis in part two is made as for the activities from 11 to 14 including is
separated only the data for NCOs, functioning in these spheres.
The terms “noncommercial organizations ” and “non-profitmaking organizations”
are used in the study as synonymous – for indication of the whole group of
noncommercial organizations, despite the type of activity performed. The notion
“nonprofit organizations” is used in a narro wer sense. Here are included only the
noncommercial organizations from gr oup 1, 2, 3, 4, 6, 9, 11, 12, 13 and 14. One
additional group non-profit organizations have been considered, from which are excluded
chitalishta and NPOs, performing physical culture and sports activity. It is accepted that
the Non-profit legal entities act that entere d into force on January 1, 2001 regulates the
activities of these NPOs.

I.2. Indicators for measurement of the NCOs activity
The activity of NCOs is measured and an alyzed more difficultly than the one in
the commercial sector due to the nature of services, which they provide and the
accountability procedure they have to observe . in the present study for measurement of
this activity are used several groups of indi cators. First, is the SNA data, characterizing
the produced production, the intermediate cons umption and the added value in the sector.
Second, are the employment data and employ ees’ salaries, characterizing the labor
efficiency. Third, is data from incomes and expenditures reports, which serves as a base
for the use of the indicators in the preceding two groups.
The main measures of the NCO activity are the total production, intermediate
consumption and the added value. They are counted in observation of the methodological
recommendation of SNA for the accounting of the non-market producers.
The gross production (GP) is measured on the basis of paid current expenses for
the accomplishment of the respective activ ity, including the consumption of general
capital. For NCOs the indicat or gross production is a sum of their economic and non-

7

economic activity production. The one from non-economic activity is equal to the
administrative costs, made in the sector for accomplishment of this activity. Here are
included the expenses for mate rials, outside services, salaries, social security and
consumption of general capital.
The intermediate consumption (IC) generalizes the current production expenses
for materials used and paid outside servic es. Here are not included the expenses for
compensation of hired employees, as well as the general capital consumption.
The added value (AV) represents the difference between the produced gross
production and the intermediate consumpti on. For NCOs, providing services free of
charge or at economically unimportant pr ices, the added value of their non-economic
activity comprises in its structure of compensation of the hired personnel (as initial
expenditures for the unit and initial income for the hired persons) and consumption of
general capital. While the NCOs perform non-economic activity, the consumption of
general capital eliminates the gross opera ting surplus, as the net operating surplus
5 for
them is zero. The net operating surplus for NC Os may be different from zero as a result
of the performed by the NCOs economic activity.
The disposable income (DI) is indicator, which is formed in the process of
distribution and redistribution of incomes. It is used for final consumption and savings,
which defines the financial pos ition of the sector: net possibility for financing or net
need of financing.
The connection between the listed above NCO sector indicators can be presented
generally through the following equations:
(1) AV = GP – IP (in the Production account)
(2) OS = AV – (CHP + SSP) (in the Generating of incomes account)
(3) DI = II+OS + current transfers (received minus given) (in the Distribution of
initial incomes and Secondary di stribution of income accounts)
(4) Saving = DI – expenses for final c onsumption (in the Use of disposable
income account)
(5) Net possibility/need of financing = savi ng + capital transfers (received minus
given) – gross formation of general cap ital – alteration of reserves (in the
capital account)
AV – added value in the institutional sector
GP – gross production
IC – intermediate consumption
ОS – operating surplus
CHP – compensation of hired persons
5 The net operating surplus is the balance position in the generating income account. It is counted as from
the added value are deducted compensation of the hired personnel and the paid production’s taxes and are
added the received subsidies.
8

SSP – social security payments
DI – disposable income
II – initial incomes (net)

The basis for construction of indicators, measuring the NCO activity is the
accountancy information, part of the incomes and expenditures report. Up to 1997
accounting standards do not allow the accounting of the specific operations related to the
realization of non-profit activity and all units present their financial situation and results
from the activity performed in the reports scheme of companies from the sector “Non-
financial companies”. Since 1998 significant changes in the NCO accountancy system
had been introduced. Two types of incomes a nd expenditures reports were implemented –
for independent accounting of non-economic and economic activity. This created
conditions for precision of accounting, prepar ed on the basis of SNA methodology for the
period after 1997, especially w ith regard to the gross production accounts, added value
and operating surplus (in result of the performed economic activity).
It should be noted here that the form ation of the dynamic lines for the whole
period 1991-2001 г. for the most indicators is impossible due to the transition nature of
Bulgarian economy and the often happening me thodological changes in the data (as well
as in the content of initial data and in the methodology of their aggregation). All this
impedes the statistics data administration and its on-time transformation in a comparable
shape through the last years of the studied period. Due to those reasons the disposable
income data, savings and net financial pos ition towards the institutional sectors is
available only up to 1997 including.
The employment and salaries data in th e NCO sector is available for the period
1997-2000 and only for these organizations that are classified as performing activities
from 1 to 9 including in chapter I.1 of Part one.
Due to the specified above change in accountancy in 1998, the existing and
comparable data for NCO incomes and expenditures are for the period 1998-2000.
Although the informational limitations narrow down the abilities for shaping the whole
picture for the NCO sector dynamics, the av ailable data gives sufficiently clear and
trustful idea about the sector developmen t tendencies in the last ten years.

Part two. NCO development in Bulgaria during the 90s

II.1. Production and added value
The statistics show that the NCOs still have insignificant share in the economy of
Bulgaria. In 2001 the added value in this sector is 62.8 million BGL and hardly forms
0.21% of the GDP of the country. This is its ma jor relative share for the last ten years.
During the period 1991- 1998 the sector’s share in GDP is comparatively stable (between

9

0.12 and 0.15% 6), аnd in 1999 rose and during the next two years remained at the level of
0.2% 7 (Graphic 1).

Graphic 1
Relative share of NCO in GDP
0.000% 0.050% 0.100% 0.150% 0.200% 0.250%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Относителен дял на
НТО в БВП

The comparison between the real increase of the above stated indicators is a better
sign for NCO development due to the differe nt deflators of added value in NCO and
GDP. In 2000 and 2001 the real increase of the added value, created by NCOs is
respectively 7.7 and 9.6% and is respectively with 2.3 and 5.6 percen ts higher than the
state GDP increase during these years (Graph ic 2). Probably the increased dynamics of
NCO during the last years is a result of the improved macro-economic and institutional
environment, in which NCOs are functioning.
Graphic 2

6 Except 1995, when the share of NCO in GDP rose to 0.19%.
7 For comparison the sector’s share in the GD P in Norway and USA is around 4 percent.

10

Real rates of changing of some indicators
-20 -100
10 20 30
40 50
1995 1996 1997 1998 1999 2000 2001
GNP
Added value of NCO
expens es for final
c ons um ption – total
expens es for final
c ons um ption of NCO
%

In 2000 the added value of NPOs is 31.8
million BGL (58.3% of the added value
in the NCO sector) and represents 0.12% of state GDP. If we exclude from the NPO
group the Chitalishta and the sports organiza tions, the added value would be 23.1 million
BGL, and the NPO share in GDP goes dow n to 0.087%. Only the NCOs, performing
physical culture and sports activity have produced 1.9 million BGL of added value in
2000.
The disposable income of NCOs systema tically and sensitively exceeds the gross
added value gained in this sector. In 1997 8 this increase is more than 4 times. The gross
added value of these organizations is 26.6 millio n BGL, and the disposable income of the
studied sector is 109,6 million BGL. This is a result of the redistribution processes as a
consequence of which net sources flow to wards the NCOs. Besides the NCOs, only the
sector «State governance» the transfers received exceed the ones given, i.e. the
redistribution processes lead to resources transfer from non-financial and financial
entities, households and the fo reign sector towards the state budget and NCOs. Of course,
the size of the received ne t sources of the non-governmental sector (101 million BGL) is
very small (25 times less in 1997) compared to State governance.
In 1997 the net transfers towards the NCO sector represent 92,1% of their
disposable income. The rest of the disposable income is formed from initial income and
the operating surplus in the sector. From the last two elements of the disposable income
8 As was noted down in I.2. for the transfers indicators, disposable income, savings, gross formation of
general capital and net possibility (need for) financing by economy sectors there is no data for the period
after 1997.
11

in the non-governmental sector a dominant share (96% in 1994 and 74% in 1997) have
the initial incomes, which are a result of the specificity of the studied sector as a
combination of non-profit making economic units.
The disposable income is distributed be tween expenditures for final consumption
and savings. For the NCO sector the peri od 1991-1997 could be divided into two sub-
periods. Up to 1996 the expenditures for final consumptions have exceeded the
disposable income in the sector, which cause d negative savings in the sector, i.e. during
that period the sector needed additional re sources in order to function. In 1996 and 1997
the situation is radically changed, because the transfers, distributed towards the non-
profitmaking sector during these years increased significantly and are far greater than the
real possibilities for their absorption by the NCOs that ar e much undeveloped. Thus,the
NCO sector during these years increases its fi nancial assets and to occupies the position
of net lender in the economy in the pe riod of financial and economical crisis.
The analysis until that point shows that although it was created after the beginning
of the transition period, the NCO sector gradually strengthens financially in the
conditions of strong budget limita tions. That indicates the sector as a possible important
factor for a long-run growth in the economy if a favorable model of economic policy for
its further development exists.
The final consumption expenditures of NCOs for the economy in general
reconfirm the insignificant role of NCOs for the development of Bulgarian economy.
Although the fact that during the period 1991 -2001 this share rises twice, even its
maximum stays very low – ha rdly 0.52% in 2001 (Graphic 3). The real growth of the
final consumption expenditures in the NC O sector since 2000 until now significantly
surpasses not only the growth of the final consumption expenditures for the economy in
general, but also the growth of GDP for th e respective years (Graphic 2). Most clearly it
is seen in 2001 when the physical volume i ndex of final consumption expenditures of
NCOs, serving households is 114,8, the final consumption expenditures is 104,5, and to
GDP – 104. The change in the trend of deve lopment of the non-profitmaking sector is
probably caused by the far cl earer conditions regulating NP Os and as a result of the
general macro-economic stability.
Graphic 3
12

Relative share of final consumer expenses of NCO in the total final consumption
0.000% 0.100% 0.200%
0.300% 0.400% 0.500% 0.600%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
относителен дял на НТО

In the gross formation of NCO general cap ital is also noticed a growing tendency
of the absolute share of this indicator as well as of its relation to the gross formation of
general capital for the economy as a whole. In 1991 this share is hardly 0.08%, while in
1997 it rises to 0.58%.
The analysis up to here allows us to make the following conclusions about the
NCO activity in Bulgaria and about th e environment they are operating in:
First , NCOs contributed insignificantly to the economic development of Bulgaria
in the 90s of 20th centu ry and the beginning of 21st cent ury. The comparative analysis
shows that their relative share in GDP is much lower in comparison with other countries.
Second , through the years of economic and financial crisis (1996-1997) the NCO
sector is in a position of net lender in the economy, but due to its insignificant relative
share has not been in a situation to play the role of a buffer and to decrease the crisis
level;
Third , in the last two years have been created more favorable macroeconomic and
institutional conditions for the operation of NCOs and as a result they are developing
with a faster rate in comparison with the dynamics of the economy as whole.

II.2. Employment and work salary
In contrast with the growing dynamics of the indicators, characterizing non-
profitmaking sector from the added value point of view, in the last years the number of
the employed people in NCOs gradually go es down – from 16771 persons in 1996 to

13

11502 in 2001. 9 This dynamics follows the tendency for decrease of the employment in
the economy for the same period. Irrespective of the downward tendency in the number
of employed in the non-profitmaking sector, their increase through the last year of the
studied period should be noted. For 2001 their share rose from 0.36% to 0.39% due to the
increase of employed in NCOs (with 9%) while there was a total decrease of the
employed in the economy as a whole (with 0.1%).
Structure of the employed by NCO in 1997 (%)
5.4 4.8
0.02.7
15.8
2.3
11.8
57.2
Business organizations and art unions Art unions Associations of cooperative organizations Syndicate organizations Other NCO Political organizations Religion organizations Chitalishte

9 As was noted down in part one, I.2. the employment
data for NCOs is available only for activities from 1
to 9, exclusively. By indirect assessments (on the ba sis of hired persons in the compensations data of all
NCOs) the number of all occupied in the NCO sector is around 16 000.
14

Structure of the employed by NCO in 2000 (%)
6.92.0
0.4 2.2
20.6
2.6
15.3
50.0
Business organizations and art unions Art unions Associations of cooperative organizations Syndicate organizations Other NCO Political organizations Religion organizations Chitalishte

The chitalishta engaged above one half of
the employed in the NCO sector (5280
persons in 2000). Their rela tive share gradually decreases – from 57.2% in 1997 to 50%
in 2000 due to the relatively faster grow th of employed mainly in the religious
organizations and these from the group «Activit y of other NCO». In these two sectors the
employed in 2000 are 1619 and 2172 persons.
The dynamics of the employment in th e NPOs coincides with the downward
tendency with regard to employment in th e entire NCO sector. From 10096 persons in
1997 their number decreased to 8433. If we exclude the group of Chitalishta, the
employed people in these organizati ons are 3157 in 1997 and 3153 in 2000.
In the NCO sector work primarily women and they are relatively with regard to
men. Women amount to 6748 people in 2000 or 64% of all employed people in NCOs. If
we take only the NPOs, the share of wo men is even higher (74% in 2000 or 6252
women), and if we exclude Chitalishta from the group of NPOs, in 2000 in NPOs have
worked 1939 women (61.5% of all occupied in NPO group without chitalishta).
Women have the biggest share in the groups «Chitalishta», «Creative unions
activity» and «Activity of business organizations and professional unions, besides the
creative ones» – respectively 82%, 69% и 67% in 2000, and the lowest is the relative
share in «Religious organizations activity» – 14%.
The analysis shows that the added value of a person employed in the NCO sector
is much lower than the added value measured with respect to economy as a whole. In
2001 the proportion between added value in the non-profit sector of an employed person
and the added value for the entire economy of one employed person is around 1:1.8. Due
to the fact that the data fo r the employment in non-profitmaking sector is not full, the
regarded proportion is even hi gher. This is explained with NCOs nature as non-profit
making economic entities, because of whic h the level of operating surplus as a
component of the added value is insignificant.
15

The payment in the NCO sector is relatively lower than the average for the
economy. In 1990 the average annual salary in NCOs is significantly below the average
salary for the country (with 36%), but through th e last years is has risen relatively fast
and in 2000 it is only 11% less than the average annual salary for the country. The
average annual salary in the sector in 2000 is 2433 BGL. The average annual salary of
women in NCOs is 75.5% of the men’s and 89.8 % of the average annual salary, paid in
the sector.
The average annual salary in NPOs for 2000 is 2468 BGL, but excluding
Chitalishta it rises to the level of 3961 BGL.
According to the classificat ion of the activities groups, included in NCO sector,
the highest is the annual salary of the occupied in «Associations of co-operative
organizations» (6548 BGL in 2000). This salary exceeds 2.5 times the average salary in
the sector, and the lowest is the annual salary of the occu pied in the chitalishta (1576
BGL). The payment differentiati on among NCOs on the basis of activity performed is 4.2
times.
In summary, the employment in the non-prof it sector analysis shows that through
the last years the number of employed in NCOs falls down parallel with the increase in
the unemployment indicator for the count ry. Irrespective of this tendency, in 2001
together with the increase of added value in the NCO sector, an increase of the number of
employed persons in it is observed as well. The payment in the sector is significantly
below the average for the economy, but gradually the difference between the average
annual salary for the country and the average annual salary in the NCO sector will be
eliminated. The change in the employmen t tendency and the approximation of the
payment level in the studied sector and the av erage for the economy can be regarded as a
result of the more favorable conditions, in wh ich NCOs are acting in the last two years.
II.3. Incomes and expenditures of NCO for the period 1998-2000
The nominal incomes of NCOs by both economic and non-economic activity are
180 274 000 BGL and 238 426 000 BGL respectiv ely for 1998 and 2000. They increase
from 0.8% of the GDP of the country fo r 1998 to 0.89% in 2000. The incomes only of
non-profit organizations are respectively 134 755 BGL. (0.6% from GDP) in 1998 and
175 567 BGL (0.66% from GDP) in 2000. Excl uding the Chitalishta and sports
organizations, the income of NPOs in 1998 and 2000 is respectively 113 629 BGL and
149 160 BGL (0.5% and 0.56% from GDP).
Throughout the studied period the incomes from non-economic activity constitute
almost 85% of the incomes of NCOs. Th e remaining 15% incomes from economic
activity are primarily (around 90% of th em) incomes from sale of production
10. The tax
legislation in force does not stimulate NCOs to perform economic activity, with which to
facilitate the achievement of their goals due to the taxation of their profit, formed as a
result of their economic activity.
The largest incomes from economic activity have the NCOs from the «Activity of
business organizations and employers’ or ganizations» group. The economic activity
10 The differentiation between economic and non-economic activity of NCOs is very important
due to their different tax treatment, which is di scussed in detail in part III of the study.

16

incomes of these NCOs form over 60% of all the incomes from economic activity of
NCOs. The economic activity incomes of the NCOs from «Activity of business
organizations and employers’ organizations» and «Activity of professional unions and
organizations, without creative ones» groups are larger than these from non-economic
activity. This is logical, consid ering the fact that these NCOs are tightly connected with
the business and probably a large part of them are market NCOs. Chitalishta have
insignificant incomes from economic activity, while political parties do not have such
incomes.
Structure of income from non-profit activity of NCOs
32,5 21,9 28,5
14,1
11,8 6,2
34,2
38,6 37,4
9,8
9,6 9,9
3,0
7,5 8,4
6,4
9,4 8,6
0%
20% 40% 60% 80%
100%
1998 19992000
Profit from economic activity
Financial income
Other income
Subsidy
Donations
Membership fee
Income from regulated activity

The main source of income for the non- economic activity of NCOs are donations,
followed by incomes from regulated non-economic activity 11. For the period 1998-2000
in the structure of incomes from non-economic activity the share of donations gradually
increases (from 34.2% to 37.4%) basically as a result of the relative decrease of
membership fees (from 14.1% to 6.2%).
More than 1/3 of the s ubsidies, which NCOs received in 2000 are directed
towards Chitalishta. Due to this fact, if we exclude the Chitalishta and sports clubs from
the group of NPOs, the subsidies share in the structure of incomes from non-economic
activity of NPOs goes down with 5.1 percents with respect to the whole group of NCOs
(from 9.9% for NCOs to 4.8% for NP Оs without Chitalishta and sports organizations).

11 The regulated activity is set forth in the Statute of NCOs and incomes from it are related with the
activities performed according to this Statute. For example for the Architectures Union in Bulgaria incomes
from regulated activity are the incomes from organization of competitions, exhibitions, distribution of
surveys, reports, related to the Union activity etc.
17

Structure of income from non-profit activity of NCOs in 2000
28,5%
6,2%
37,4%
9,9%
8,4%
8,6%
1,1%
Income from regulated activity
Membership fee
Donations
Subsidy
Other income
Financial
income Profit from economic activity

Structure of income from non-
profit activity of NCOs in 2000
26,8%
6,2%
41,1%
9,9%
8,9%
5,8%
1,2%
Income from regulated activityMembership fee
Donations
Subsidy
Other income
Financial
income Profit from economic
activity

18

Str uctur e of incom e fr om non-pr ofit activity of chitalis hte in 2000
15.0%0.5%
2.2%
62.3%
18.4%
0.4%1.2%
Inc ome f rom regulated ac tiv ityMe mb e r s h i p f e e
Donations
Subs idy
Other inc ome
Financ ial
inc ome Prof it f rom ec onomic ac tiv ity

Structure of income from non-profit activity
of NPOs, in the sphere of physical culture
and sports in 2000
50,0%
3,4%
13,0%
13,0% 15,0%
5,2%
0,4%
Income from regulated activity
Membership fee
Donations
Subsidy
Other income
Financial
income Profit from economic activity

Very essential differences between the st
ructures of the incomes of the separate
NCO groups could be noticed. The analysis sh ows that in the group «Activity of business
and employers’ organizations » the biggest relative share in the incomes from non-
economic activity have the incomes from regulated activity (35.7% in 2000) and
membership fees (26.5%), in the group «Activity of professional unions and
organizations, besides creative ones» and «A ctivity of syndicate organizations” – the
membership fee (respectively 38.4% and 62.3%), and in the associations of co-operative
organizations – the membership f ee (48.6%) and the subsidies (27%).
Incomes from non-economic activity in th e groups «Education and qualification»,
«Other NCOs» and «Activity of political organizations» is formed primarily of donations

19

(respectively 33.8%, 53.9% and 61.4%), in the healthcare and social services – subsidies
(92.7%), in the chitalishta a nd cultural activity – also subs idies (respectively 62.3% and
58.1%).

Distribution of subsidi es and donations between
the separate groups of NCOs in
2000

Donations
(thousand.lev.)
Structure
Other NCOs (gr. 6 от I.1) 56675 75,9%
Education and qualif ication 11197 15,0%
Physical culture and sport activity 1855 2,5%
Activity of political organizations 1973 2,6%
Activity of religious organizations 1851 2,5%
Remaining NCOs 1128 1,5%
Total 74679 100,0%

Subsidies
(thousand.lev.)
Structure
Chitalishte activity 6738 34,2%
Healthcare and social care 1717 8,7%
Education and qualification 2561 13,0%
Physical culture and sport activity 1860 9,4%
Other NCOs (gr. 6 от I.1) 5057 25,6%
Remaining NCOs 1797 9,1%
Total 19730 100,0%

The largest incomes from donations are observed in NCOs working in the field of
education and qualification and those in the «Other NCOs» group. The state budget
subsidies are directed primar ily towards NCOs, performing chitalishte activity, education
and qualification and for the group «Other NCOs». If from all NCOs these pursuing
religious, political and syndicate activity are excluded, the donations for the remaining
part of the NCOs will form 79.2% of all don ations for 2000, and the subsidies would be –
72.3%. If from the NCOs group we exclude chitalishta and sports clubs the donations
share will decreases to 76.4%, and in regard to subsidies – to 28.7%.
Both the incomes, and the expenditures of NCOs outgrow the nominal GDP and
their proportion in regard to GDP rises from 0.6% in 1998 to 0.8% in the next years. In
nominal figures the expenditures of NCOs in 1998 and 2000 are respectively 133 114 000
BGL and 215 562 000 BGL. The proportion of NCO expenditures to the GDP in 2000 is
0.57% and 0.47% in 1998. If from all NCOs we exclude Chitalishta and sports
organizations, their share decreases to 0.37% in 1998 and 0.48% in 2000.
The NCO expenditures are formed from the expenditures for economic and non-
economic activity of these organizations. The non-economic activity expenditures
20

represent around 85% of all NCO expenses and comprise of regulated activity expenses,
administrative and financial expenses. Relative ly the largest share have the administrative
costs, which in 1998 are 58.5% from all NCO expenses, and in 2000 – 56.3%. The salary
and outside service expenses are the main components of the administrative costs of
NCOs. The salary and the soci al security expenses paid by the employer form the major
part of the added value in th is sector – about 86% in 2000
12.
Structure of expenses for non- profit activity of NCOs
23,423,8
20,8
1,1
1,1
1,0
13,7
14,1
16,7
58,5
57,9
56,3
2,6
2,2
4,3
0,6
0,9 0,9
0%
10% 20% 30% 40% 50%
60% 70% 80% 90%
100%
1998 19992000
Loss from economic activity
Financial expenses
Administrative expenses
Other expenses
Membership fee
Donations

The main component of the regulated non-economic activity expenses are the
donations. Almost all the expenses in the fo rm of donations are made by NCOs, included
in the group “Other NCOs” – 98% in 2000. The comparison between received and given
donations shows that NCOs donate about one half of the received by them donations.
Only for the NCOs from the group “Others” this proportion is 66% for 2000. In that way
NCOs perform a redistribution function, but co ntrary to the state budget, the flow of
resources towards NCOs does no t have an obligatory, but rather a voluntary nature.
Sources of donations for NCOs are the fore ign sector, the non-financial sector and
households, and the resources collected are di rected towards the sphere of activity, the
respective NCO is registered for.
Analogically to the incomes situation, the economic activity e xpenses of NCOs
from the group «Activity of business and employers’ organizations » exceed their non-
economic activity expenditures and represent about 70% of the general size of the
expenses of these NCOs.
With regard to incomes and expenditu res of NCOs the following conclusions
could be outlined:

12 The remaining part of the added value in the non-profitmaking sector represents consumption of
general capital and operating surplus in result of economic activity, performed by the NCOs.

21

First , the gradual, but not significant expansion of the NCO sector, defined in the
previous two points, finds expression in th e ratio of their incomes and expenditures
towards GDP. As a whole the economic activity incomes are insignificant with respect to
the general incomes of the non-profitmaking organizations.
Second , the income structure of NCOs is in a close dependence with the
respective NCO activity specificity. While so me of them attract significant in size
donations and membership fees, others rely primarily on state subsidies.
Third , NCOs play a redistributing function, but contrary to the state budget, the
resources that flow towards NCOs does not have an obligatory, but rather a voluntary
nature. Sources of donations to NCOs are the foreign sector, the non-financial sector and
the households, and the raised money is dire cted towards the activity sphere that the
respective NCO is registered for.

Part three. Tax treatment of NCOs
Troughout the last two years the institutio nal environment in which the NPOs
work has been sufficiently improved. Sin ce the beginning of 2001 the Law on non-profit
legal entities (LNPLE) entered into force an d were adopted new tax concessions for their
activity, i.e. there are indicat ions for the increase of the economic importance of the
sector.
The tax deductions relate to both NPOs 13 and the other economic subjects, in their
virtue of donors. NPOs may perform econo mic activity, which raises the question how
they should be taxed in this case. The si ze and the structure of the tax deductions
provided in the respective countries are different – a variety of possible alternatives exists
in the different states, and they depend on the level, on which the governments want to
facilitate the NPOs and the state bodies ar e concerned with respect to the competition
positions of the separate subjects. Due to the fa ct that NPOs in Bulgaria work in a state
with a developing market economy, they need additional stimuli for their development.
The tax treatment of NPOs depends on the type of performed activity and is
regulated as follows in the different tax laws:
Law on CorporateIncome Taxation
When the economic activity of NPOs is analyzed usually arise two questions
between which a distinction s hould be made – should the NPOs be allowed to perform
economic activity
14 and whether the profit from this activity should be taxable.
According to the current legislation in Bu lgaria, the non-profit organizations may
perform supplementary economic activity only if it is related to the main activity the
NPOs are registered for (Art. 3, sub-art.3 of LNPLE). Theincomes from this activity may
13 Translator’s note: In Part three of the analysis the term NPOs refers to legal entities with nonprofit
purposes as defined by the LNPLE.
14 There are at least three variants : a total ban for performing economic activity; the economic activity is
permitted only if it is related to the scope of main activity of the organization; the performance of economic
activity is entirely permitted (directly or indirectly – by an affiliate).

22

be used solely for achievement of thedefined in their statute goals. This definition of the
LNPLE according to which the economic activity is partially allowed, raises the question
for separation of the economic activity that is ta rgeting profit from the one that is related
to the main activity of a respective organization. It is not always so easy to make such a
distinction. The productive activ ity of a certain cooperative, in which disabled are
involved, will more probably have as a main goal providing employment to people in a
vulnerable social position, th an increasing the profit.
Irrespective of the real goal of the economic activity performed, its existence
makes the NPOs tax subjects, according to Art.6, par.1 in connection to Art.4, par.1 from
LCIT. This legal requirement is very limitativ e, having in mind that according to art.3,
par.3 and par.6 of LNPLE the nonprofit lega l entities do not distribute profit and are
obliged to use the income from their econo mic activity for pursuing their non-profit
goals. The taxation of these funds diminishes the NPO resources and does not correlate to
the latest amendments of art.23, par.3, 1 of LCIT, with which was increased from 5% to
10% the allowed tax deduction be fore the tax transformation of the financial result of
donations to NPOs performing public benefit activity.
According to LCIT a hypothesis exists , according to which the NPOs are not
taxable under art.6, par.1, point 2 when for the realization of activities, related to their
main activity are collected fees, which c over only the expenses for organizing them.
When fees are determined on a market basis it is considered that there is an economic
activity performed and the hypothe sis above is inapplicable. The membership fees are not
recognized as income from economic activit y and are not taxable under LCIT. The law
should explicitly state that the sale of asse ts, used in the non-economic activity, including
sale of donated objects is not an economic activity (and therefore is not taxable).
With respect to the taxes, due at the inco me source, regardless of the fact whether
the NPLEs perform economic activity or not they are taxed with 20% under art.36, par.1
and par.4. When they do not perform economi c activity, respectively they are not tax
subjects under LCIT; they do not pay the tax under art. 25 (25%) and art.36, par.2 (20%).
The latter are due only when economic activ ity is performed. The tax on dividends and
liquidations shares, paid by local entities to NPOs under art.34, par.1 is 15% and is also
due at the source.
The tax treatment of NPOs under LCIT is ve ry controversial, because on one hand
it stimulates charitable activity (before tax modification the financial result is decreased
with up to 10% with the amount of the donati ons), and on the other hand – the profit
formed as a result of the economic activity of the public benefit NPOs is taxed with
municipality and profit tax. Among the Cent ral and Eastern Europe states, only in
Bulgaria, Albania and Romania the economic activities of NPOs are taxed. The
international practice is tax exemption for th ese incomes, for which different rules are
used – according to the use of the income s (Poland), based on the type of economic
activity (Latvia, Estonia) and other more-complicated tests
15 (Hungary, Czech Republic,
Slovak, Croatia).
15 See ICNL, “NPOs in Central and Eastern Europe tax regime”, p. 13-20.
23

In case the whole profit should be used for public benefit goals according to
LNPLE, its taxation is not economically effective and rational. The profit and
municipality taxes for public be nefit NPOs may be fullyremised
16 and the income from
passive investments (incomes from bank depo sits interest and government securities)
should not be considered economic activity. Th e remised resources will be accounted as
reserves, and their transfer will be valid when they are used for accomplishment of the
defined goals in the Statute or the Articles of Incorporation. This mechanism will provide
security with regard to legal use of the re mised resources and will have at least two
aspects. First, it will directly increase the resource, disposable for the accomplishment of
the NPO activity. The remise will increase the stimuli for NPOs to perform economic
activity that is directly relate d to their main activity, and will have an indirect support for
the achievement of their goals as well. Sec ond, an important aspect that should be taken
into consideration is to what loss of budget incomes will lead that action
17. For that
purpose we will use the data of the annual re ports for the realization of consolidated
fiscal program (see table). The profit and municipality tax incomes from NPOs (including
mutual benefit ones) form about 0.1% of th e total incomes from this tax and about
0.0068% of the consolidated budget incomes
18. The distribution of the loss from these
incomes between the municipalities’ and the republican budget is not important for the
current analysis, because based on the planned changes in the tax policy is probably in
average term all profit tax incomes to flow in the republican budget.
The minimal budget loss shows that there is no direct risk for the stability of
public finances from the decision not to ta x NPOs. There could appear some indirect
risks for this stability, if the NPO activity is directed towards self-profiting of the related
to the organizations individuals, but not towards accomplishing of their nonprofit goals.
This is a problem of control on the side of the tax administ ration, the Minister of Justice
and the fair NPOs for observance of LNPLE and should not be a motive for limitation of
the tax policy for the whole sector.
Income from tax on profit and tax for municipality from non-profit organizations *
1997 1998 1999 2000 2001 2002
In thousand BGN** 1 351.8 1 289.7 1 135.8 792.0 980.8 848.7
in % from the total income from tax on profit and tax for munici palit y 0.124 0.154 0.161 0.116 0.092 0.115
In % from the total income for the consolidated bud get 0.021 0.014 0.012 0.007 0.008 0.007
*before 2001 this position has been “income from or ganizations with non- profit purpose”
**The data is in denominated; for 2002 the data is approximate
16 Translator’s note: “remised” should be understood as calculated but not taken by the state and re-invested
in the operations
17 In a special Application are valued the consolidated budget incomes loss from each proposal in the tax
treatment of public benefit NPLE.
18 The part of these incomes in the consolidated budget will decrease in the midterm, because the
governmental tax policy is oriented towards diminishing direct taxes, including the profit tax. In the
current moment it is foreseen that the effective tax size will decrease from 25% to 20% in 2004 and from
20% to 15% in 2005.
24

It is possible that some public benefit NPLE own shares in local legal entities or
non-personified associations, wh ich pay to them dividends or liquidation shares. In that
case a 15% tax based on art.34, par.1 of LC IT is due at the income source. The
designation of these incomes for NPOs is no t different from that of incomes from
donations or from related economic activity. The shares may be a result of passive
actions – received as a donation, or active act ions, related to the accomplishment of the
non-profit goals of these entities . The price of the shares is generally calculated as a net
present value of the future income from them (dividends and liquidation shares), i.e. the
taxation of these incomes of NPOs by its vi rtue represents taxation of donations or
income from economic activity, depending on the way of receiving the shares.
If Art.34, par.1 text is amended in a wa y that public benefit NPOs are excluded
from its scope, there will be no big loss of budget income. The precise amount cannot be
defined, because for these incomes, informati on for the amounts received from this tax is
not collected, but an indirect assessment could be made on th e basis of the data from the
income statements of NPOs, the national a ccounts and the reports for the consolidated
fiscal program. We will assume that the share of the created added value by NPOs in the
gross added value for the economy, is approximately equal to the share of the income
from the tax on dividends and liquidation shares paid to NPOs, in the total income from
this tax. In this situation the loss of income for the consolidated budget resulting from the
amendment of art.34, par.1, namely that the dividends and liquidation shares paid to
public benefit NPOs will be tax-exempt, will be equal to about 0.04 million BGL
annually (as a basis is year 2002) or 0.0003% of all incomes.
Tax benefits for public benefit NPOs might be directed either towards
encouraging charity or to increasing dispos able income, resulting from the organizations’
activity. The presented here pr oposals for amendments of LC IT were based on the idea
not to tax the income from their activities. If the government is willing to support an
increase in the stimuli for charitable activit y, this might be realized by means of changes
in the taxation policy towards donations. As the different tax subjects have different
opportunities and willingne ss to donate, law provides for a limit for tax-exempt donations
of up to 10% of the generated profit before tax transformation. The donations, accounted
as expenses, are taxed with a 25% tax at the in come source, and this tax is accepted as an
activity expense and is not included in the transformation of the financial result under
Part two of LCIT. This tax basis limits the possibility to make donations in an amount
higher than the defined level of 10% or in case when profit has not been generated,
because it will lead to increase of the tax ob ligations. In that way the greater willingness
to donate is taxed more than the lesser will ingness. If the contrary taxation philosophy is
preferred, according to which the greater willin gness to donate is taxed less, the tax size
in art.48, par.1 in connection with art.35 shoul d be decreased (parting its part concerning
donations). One possible solution c ould be a tax size of 15%. If this tax is introduced, the
possible loss of income for the budget is difficu lt to be assessed, because there is a high
probability for a change in the economic ag ents’ motivation for increasing the donations,
which they make. If we presume that thei r motivation will stay unchanged, the maximum
loss of income for the consolidated budget (basis 2002) will be 0.6 millions BGL or
0.0045% from the total incomes. Another possibility for stimulating charitable activity in
which a greater foreseeability of the budget expenditures would exis t, is the amendment

25

of art.23, par.3, point 1 by increasing the acceptable limit from 10% to 15% for
deductions from the financial result of donations , made from the capital reserves,
respectively from the account of the owner. This approach is not related to the variation
of the willingness to donate and is less effec tive than the previous one. The increase of
this limit may be gradual through the years, be cause if the change is made at once, the
maximum loss of income for the budget will be about 36.7 millions BGL (0.29% from all
consolidated budget incomes, basis 2002). The re latively huge incomes’ loss in this case
is supporting the gradual decrease of the limit or diminishing the tax size in art.48, par.1
with respect to public benefit NPOs.
According to art.4 of LNPLE the gove rnment may support and stimulate the
registered in the Central register 19 public benefit NPOs through tax, credit, interest,
customs and other financial and economic be nefits, as well as funding under conditions
and regime defined in the respective laws. The current benefits under the LCIT, which
the NPOs can use, show that the government of Bulgaria has estimated for beneficial to
facilitate their activity through tax benefits. Their structure is insufficiently effective and
has to be changed in order to eliminate the controversies in the law. The changes should
be in consideration of the fact that irrespective of the s ources of their incomes, NPOs are
obliged to use them for the accomplishment of the defined in the Statute or Charter of
Incorporation goals. This suppos es that the tax treatment of these incomes should be
equal, i.e. the profit and municipality tax of public be nefit NPLE should be fully remised,
and the calculated in their be nefit dividends and liquidations assets should not be taxed
under art.34, par.2 of LCIT. If we accept th e idea, according to which the greater
willingness to donate should be taxed less, th e tax size under art.48, par.1 in connection
to art.35 (in the part concerning donations) ma y be diminished to 15%. As a result of all
the proposed amendments of LCIT the maxi mum loss of income for the consolidated
budget will be roughly 1.4 million BGL or 0.01% from all incomes, i.e. it would not
destabilize the public finances.
The proposed amendments to LCIT will give a competitive advantage of public
benefit NPOs with respect to the rest of the economic subjects. The power of this
advantage is limited by the LNPLE provisions, according to which the economic activity
of NPOs should be related to the subject of their main activity. NPOs are facing some
others limitations such as the absence of sufficient access to the capital market and
financing, which to use for development a nd modernization of their economic activity.
Therefore the used by them tax exemptions should not lead to serious changes of the
competing environment, and will balance the competing positions of the separate
subjects.
Law on physical persons income taxation
In the Law on physical persons income taxation (LPPIT) is provided a benefit for
donations made to public benefit NPOs. The scope of individuals that are eligible for it is
limited (notaries; persons, performing me dical practice under the Law on healthcare
19 Central registry of NPOs for public benefit activity at the Ministry of Justice. There are 223 NPLE for
public benefit activity towards the end of May 2002.
26

institutions and other activities and services based on non-employment relationships;
individuals performing paid management a nd control; individuals receiving incomes
from rent or lease). According to art.22, pa r.1, 3 of LPPIT the benefit amounts to up to
10% from the taxable income upon deducti on under items 1 and 2 from the same
paragraph. The tax benefit might be used in ca se the individuals that make the donation,
do not have declared unpaid st ate obligations or obligations, defined with a tax revision
act at the moment of the donation making (art.28, par.1, 2 of LPPIT).
The size of the given tax benefit in case of donations to public benefit NPOs is
equal under LPPIT and LCIT, but the scope of tax subjects that are eligible for this
benefit is limited under LLPIT. The individuals receiving incomes under labour or other
equal to labour contracts form their tax basi s in observance of the rules in Part 7 of
LPPIT, where there is no deduction from the taxable income of the donations . in that
way a big part of the economically active popul ation is placed in an adequate position
regarding the stimuli for making the donations
20. This decreases the community well-
being, because it limits the ec onomic agents’ choice and the disclosure of their real
preferences with respect to the distribution and use of their incomes.
Based on preliminary NSI data the indivi duals employed on labour contracts at
the end of March 2002 are 1 905 647. The exp ected average monthly wage in 2002 is
278.2 BGL. If the taxable income is decr eased with the donations made by these
individuals
21 (only to public benefit NPOs 22), (upon deduction of personal social security
tax), the loss of income for the consolidated budget from the total income from the tax
will be equal to 2.5 million BGL (0.29% from the revenue from the income tax paid by
physical persons having labour and equal to them contracts or 0.02% from the income in
the consolidated budget), which is distributed almost equally between the republican and
municipality budgets. The income loss is relatively small, due to the low incomes of the
population, which presuppose low ability to donate
23.
Law on VAT
According to art.59, sub-par.6 of the Law on VAT (LVAT) the import of
gratuitous aid is exempt from import tax, except the excise goodswhen given to public
benefit NPOs, registered in the Central register of the Ministry of Justice. Donations of
goods, except for the excise ones, or services, and gratuitous disposal of donations are an
20 In 2001 the occupied in employment relationships represents 39.9% from the population in work active
age.
21 For the calculation is used the average ability to make donations – 6 %. For comparison the average
ability to make donations of the individuals with fr ee professions according art.21, par.3 of LCIT for 2000
is 3.99%.
22 This presupposes that NPOs will attract around 30% from these donations. 23 Upon making a donation (10% from the taxable income after deduction of the personal social security
tax) the tax burden over the average wage will decrease with 2.15 %, the total revenue from income tax –
with 6.0 BGL, and the disposable income of the don or will decrease with 18.9 BGL or 8.70 %. If the
average willingness to donate is take n into consideration (6% of the maximum amount of the donation,
with which could be decreased the ta xable income) the tax burden over the average wage falls with 0.13%,
total revenue from income tax – with 0.4 BGL,and the disposable income of donor – with 1.1 BGL or 0.52
%.
27

exempted delivery under art.49 of LVAT. In the list of individuals, in whose benefit a
donation may be made (exempted delivery) ar e not included public benefit NPOs, i.e.
donations of goods and services in their benef it are taxable, if they are not considered
import or do not fall in the category of exempt ed transactions. With this provision are
stimulated cash donations rather than in-kind and goods donations.
Laws on excises
There are not tax concessions for NPOs or for the donations made in their favor in
the Law on Excises.
Law on Local Taxes and Fees
In the Law on local taxes and fees ( LLTF) is envisaged an exemption from
inheritance tax for properties, inherited by legal entities that are not commercial,
excluding mutual benefit NPOs (art.38, par.1, point 2). According to art.48, par.1, point 4
public benefit NPOs are tax exempted for the received and given property (in-kind)
donations. In case it is proven that the transf er of property, received under the article
above, given to third parties is not connected with the accomplishment of the main goals,
for which the particular organization ha s been created, the tax becomes due.
Besides its tax policy, the government may support public benefit NPOs by giving
them direct budget subsidies. Each year with the Law on State Budget of the Republic of
Bulgaria are distributed funds for the NPOs (see table). Since 1997 the number of
organizations receiving subsidies is continuous ly increasing, but the amount of the funds
received is insignificant. The minimum state su bsidies probably will stay constant in the
short run due to the enormous financing need of almost all public services and the plans
for decreasing of the consolidated state budge t expenditures as a percentage from GDP.
The low state subsidies are a stimulus for competition growth between public benefit
NPOs in fundraising activities from other sources, which presuppose greater transparency
and efficiency of their work.
Subsidies for organizations with non-profit purpose*
1998 1999 2000 2001 2002
Provided from the consolidated bud get 0.2867% 0.2722% 0.2793% 0.1764% 0.1895%
Provided from the central re publican bud get 0.0176% 0.0178% 0.0160% 0.0242% 0.0233%
Provided from munici palities 0.1940% 0.1489% 0.1237% 0.1208% 0.1572%
Provided from ministries and inst itutions 0.0036% 0.1022% 0.1288% 0.0081% 0.0089%
Provided from external bud get accounts and funds 0.0715% 0.0033% 0.0108% 0.0233% –
*in % from the total ex penses of the consolidated bud get; the data f ro 2002 is a pproximate

Nom-profit legal entities getting subsidy from the central budget *
1998 1999 2000 2001 2002
Bul garian Red cross – National committee 899.3 966.8 993.8 1 129.1 1 168.6

28

Rila Holy place – Rila monastery 179.0 200.5 320.0 380.0 393.3
Bul garian tourist union 35.0 37.6 39.0 42.3 38.8
Union of Bul garian drivers 82.1 88.2 90.7 97.7 86.1
Union of handica ps in Bul garia 84.9 95.8 71.7 215.0 222.5
Union of war veterans and the affected from the wars and in peaceful time** 35.7 38.4 39.4 62.0 64.2
Union of war veteran coo peratives in Bul garia of wa r 12.5 13.4 13.8 22.0 22.8
Union of the blind in Bul garia 23.2 107.0 25.7 550.0 155.3
Bul garian association of people with intellectual problems*** 22.2 23.8 24.5 50.0 51.8
Union of the deaf in Bul garia 27.3 29.4 30.2 120.0 124.2
National union of production coo peratives**** 39.6 42.6 43.8 110.0 113.9
Re presentative associations of consumers in Bul garia***** 12.1 13.0 12.0 50.0 51.8
Central union of the coo peratives of handica ps 17.4 28.8 29.6 90.0 93.2
National centre for social rehabilitation 13.5 14.6 15.0 120.0 124.2
Българска асоц иаци я”Диабе т”Bulgarian associ ation “Diabetis ” 24.2 26.0 26.7 117.0 121.1
Association of parents of children with affected si ght 9.9 10.6 10.9 30.0 31.1
Association of parents of children with affected si ght hearin g 9.9 10.6 10.9 22.0 22.8
National or ganization “Youn g Bul garian people” 3.0 3.2 3.3 12.0 12.4
National association of blind-deaf in Bul garia – 10.0 10.3 25.0 25.9
National consumer coo perative of the deaf in Bul garia – – – 10.0 10.4
Union of the war veterans in Bul garia – – – – 12.0
Union of national chitalishte – – – – 20.0
*in thousand denominated BGN; the data for 2002 is a pproximate
** before 2001 the position is ” Union of war veterans an affected by the wars in Bulgaria”
*** before 2001 the position is ” National association fro support to people with mental disorders”
**** before 2001 the position is “Central union of production cooperatives”
***** before 1999 the position is “Federation for protection of the consumers in Bulgaria”

The lack of sufficiently full statistical information about the sector impedes the
précise analysis of its activity and the impact of some tax regime changes. With regard to
the public benefit NPOs, registered in the Centra l register of the Ministry of Justice, it is
possible in a short-term to collect detailed information about the amount of taxes paid by
them, type of employment and activities, for which is needs to be created a better
organization on the part of the Register.
Conclusion
If some conclusions should be made regarding the further NPO development and
their tax treatment, it is necessary these conclusions to be bound with the reasons for
support of their activity, the means for fi nancing it and the limitations on it.

29

Reasons for supporting public benefit NPOs
¾ Perform public benefit activity
¾ Accomplish an important socializing role and facilitate the replacement of
political with civic structures
¾ Replace and supplement state in providing some public goods
¾ They are efficient in proving certain public goods and in their local work with
municipalities 24
¾ Facilitate the fiscal decentralization
¾ Draw in additional support for their activity in the form of donations and
voluntary work
The listed reasons impose that the further development of the NPO sector should be
stimulated, having in mind the insignifican t contribution of NCOs in the state
economy at the moment.
Means for NPOs financing
¾ Domestic and foreign donations
¾ Subsidies
¾ Economic activity profit
¾ Main activity profit, in cluding membership fees
¾ Income from dividends and liquidation shares
¾ Interest income
¾ income from exchange rate differences
¾ Others
NCOs perform important redistributi on functions in the economy. Attracting
resources from other economy s ectors, they direct them towards realization of public
benefit activity, and with the attraction of foreign resources in the form of donations they
facilitate and stimulate the state economic growth.
Limitations and control over the NPOs activity according to the current legislation
24 An indicator for the fact that municipalities give from one half to two thirds of the subsidy from the
consolidated budget, planned for the NPOs.

30

¾ May perform additional economic activity only if it is related to the subject of
main activity they are registered for
¾ May use the additional economic activity income only for accomplishment of the
defined in the statute goals
¾ Do not distribute profit
¾ NPOs face difficulties while financing their additional economic activity
¾ Public benefit NPOs are entered in a Ministry of justice register
¾ Public benefit NPOs are subjected to inde pendent audit, if the amount of balance
assets from the previous year is bigger than 0.5 million BGL or the amount of the
income from their activity and net amount of sales, and the financial incomes for
the previous year exceed 1 million BGL
¾ Public benefit NPOs are obliged to pr epare an annual activity report, which
should provide data on: 1) performed activity, spent resources, connection with
goal and organization programs and the results achieved; 2) amount of the
gratuitously received property and other income from fundraising activities; 3)
financial result. The report is public, a nd the announcement for its availability as
well as the place, time and way for acquainting with it, is published in the Central
register bulletin
¾ Public benefit NPOs are obliged to apply for entry and to submit in the Central
register: copies of the court decisions regi stering changes in their status; list of
individuals that have been in their governance bodies; information on their main
activity; certified annual accounting report; declaration for the due taxes, customs
and other public claims; Statute or Foundation act amendments
¾ Public benefit NPOs are subject to consta nt control on behalf of the Ministry of
Justice
Motives for the necessary amendments in the tax treatment of public benefit NPOs
¾ Equalizing the tax treatment of the different income sources, as they all should be
used for accomplishment of the public benefit goals of the organizations
¾ Widening and equalizing the stimuli for donations, as in the scope of persons,
eligible for tax preferences in case of donations are included the ones receiving
incomes under labor contracts.
¾ Change of the donations taxation philo sophy – donors with higher willingness to
donate to be taxed less
¾ Real elimination of the taxation of donations in the form of share participations in
domestic legal entities or non-personified association

31

The stated above reasons for non-profit sector development stimulation and the
motives for NPOs tax treatment changes, thei r insignificant influence over the realization
of the consolidated state budget gives a clear ba sis to think that the general effect from
the realization of the proposed legisl ative amendments will be positive.
Appendix:
Calculating the income loss for the consolidated budget based on the proposed changes
in the tax treatment of NPOs in public benefit.
Proposal 1
Adoption of additional paragraphs in art.61 of LCIT with which to remise the profit tax
and municipality tax of NPOs performing pub lic benefit activity. The transferred sources
to be accounted as reserves and the transfer will be valid, if they are used for the
accomplishment of the regulated in the Statute goals.
The income loss resulted from this am endment of LCIT will be equal to
annual incomes from pr ofit tax and municipality tax, paid by NPOs
performing public benefit activity. Due to the lack of précise information
on these incomes, the closest indicator will be used – profit tax and
municipality tax incomes by NPOs (i ncluding organizations in mutual
benefit as well), which will overv alue the loss size. For 2002 these
incomes are expected to be 848.7 thousand BGL or 0.0068% from the
total incomes and aids in the consolidated budget.

Proposal 2
Dividends and liquidation shares, paid to public benefit NPOs to be placed outside of the
scope of art.34, par.1 of LCIT.
The dividends and liquidations assets tax is final and due at the income
source. There is no information inth e Ministry of Finance of on the
income from this tax, levied on divi dends and liquidation shares paid to
public benefit NPOs. The loss for the consolidated budget might be
assessed indirectly. For that purpose we will accept that the part of the
income, which is a result of the divi dends and liquidation shares paid to
public benefit NPOs, is equal to the percentage in GDP, formed by NPOs.
The value of this indicator for 2000 is 0.087%. Its stability gives us a
reason to use its value for 2000 while ca lculating the loss of income, using
the expected level of income from th e tax on dividends paid by local and
foreign legal entities for 2002 – 47.9 million BGL.
Loss = 0.00087*47887.3 = 41.662 000 BGL (0.0003% of the expected
incomes and aids in the consolidated budget)
32

Proposal 3
The decrease of the rate of tax under art.48, par.1 LCIT in connection with art.35 to 15%,
for donations to public benefit NPOs, accounted as expenditures.
The expected revenue from the tax on donations and the tax on
sponsorship in the consolidated budget is 4.628 million BGL in 2002 ,
which at the tax size of 25% forms the total size of donations, accounted
as expenditures 18.512 million BGL. About 30% of the donations are
directed towards organizations with charitable, social, environmental and
other activity, which are close to de finition for public benefit NPOs. The
decrease in the tax rate with 10 % up to 15 % under art. 48, par. 1 in the
case of donations to public benefit NPOs will lead to a loss of income for
the consolidated budget of 555.360 thousands BGL (0.0045% from the
expected incomes and aids in the consolidated budget).
Loss = 0.3*18512*0.1 = 555.360 thousands BGL ( 0.0045% of the
expected incomes and aids on the consolidated budget)
Proposal 4
Including in the scope of taxable subjects unde r LPPIT, who have right to use the given
tax deduction in case of donation to public benefit NPOs persons, receiving income under
labour or equal to labour contracts.
Based on preliminary data of NSI, the individuals employed on labour
contracts at the end of March 2002, were 1 905 647. The expected average
monthly wage in 2002 is 278.2 BGL. Upon making a donation (10% of
the taxable income after deduction of the personal social security tax), the
tax burden over the average mo nthly income goes down with 2.15
percents, the revenue from the in come tax – with 6.0 BGL, and the
disposable income of donor decrea ses with 18.9 BGL or 8.70 percents.
Due to the low population income and th e great decrease of the disposable
income, the donations’ size is very small with respect to the taxable
income. In 2000, for self-employed individuals, the donations made are
about 4% from the total size of donations, with which the taxable income
can be decreased. Therefore for 2002 with respect to persons having labo
r
relationship we will accept an aver age ability to donate – about 6%
25 from
the maximum amount of the donations, with which the taxable income can
be diminished. In accounting this ab ility, the tax burden over the average
wage decreases with 0.13 percents, th e total income tax – with 0.4 BGL,
and the disposable income of donor decreases with 1.1 BGL or 0.52
percents. If we use again the assessme nt that public benefit NPOs attract
25 The average willingness to donate is presumed to be higher on purpose

33

about 30% from the donations, the total maximum loss of income for the
consolidated budget ( basis 2002) will be:
Loss = 1905.647*0.4*12*0.3 = 2 459.466 thousands BGL ( 0.0197% from
the incomes and aids in the consolidated budget).
The total maximum loss from the proposed amendments in the legislation,
dealing with public benefit NP LE on basis 2002 will be: loss = 848.700 + 41.662
+ 555.360 + 2 459.466 = 3 905.188 thousands BGL ( 0.0313% from the total
incomes and aids on th e consolidated budget).
Bibliography:
1. Law on corporate income taxation, Law on physical persons income
taxation, Law on non-profit legal entit ies, Law on excise, Law on VAT,
Law on local taxes and fees.
2. Realization of consolidated fi scal program 1998-2001 reports and
prognoses for its implementation in 2002 (Ministry of finance).
3. Ministry of finance, “Tax policy 2003-2005”.
4. International center for not-for-profit, “NPOs tax regime in Central and
Eastern Europe”, Sofia, 2001.
5. A Symposium Sponsored By The Fede ral Reserve Bank of Kansas City,
“ Income Inequality: I ssues and Policy Options ”, Jackson Hole, Wyoming,
August 27-29, 1998.
6. Department of the US Treasury, “General Explanations of the
Administration’s Fiscal Year 2001 Revenue Proposals ”, February, 2000 и
“ General Explanations of the Admi nistration’s Fiscal Year 2002 Tax
Relief Proposals ”, April, 2001.
7. Ian Bell, “Financial regulation and Tax Policy ”, speech at the
International Seminar “ Status and Functioning of NGOs ”, Tallinn,
Estonia, September 8-10, 1995.
8. European System of Accounts, ESA 95, Eurostat
9. System of National Accounts, SNA 93, UN
10. Statistics reference book, NSI, 2002
11. Statistics annual, NSI, 2001.
12. General macroeconomic indicators 1998, NSI

34