Termination of a DZZD in Bulgaria — Procedure & Tax Consequences

What you will learn in this article

• The 6 grounds for termination of a DZZD under the OCA
• Step-by-step procedure for winding up
• How to distribute assets (voluntary and judicial partition)
• VAT deregistration — deadlines and tax base calculations
• Tax consequences under CITA and PITDA
• BULSTAT deregistration and notification of institutions
• Difference between DZZD termination and LLC liquidation

Grounds for termination

The grounds for terminating a DZZD are set out in Art. 363–364 OCA:

1. Achievement of the purpose or impossibility (Art. 363(a))

If the partnership was created for a specific purpose (e.g. performance of a public procurement contract) and the purpose has been achieved, the DZZD terminates automatically. The same applies if the purpose becomes objectively impossible.

2. Expiry of the term (Art. 363(b))

If the agreement specifies a term, the DZZD terminates upon its expiry without the need for additional action by the partners.

3. Death or interdiction of a partner (Art. 363(c))

The death or legal interdiction of a partner is a ground for termination. The agreement may provide for continuation of the partnership — with the heirs of the deceased or without them.

4. Notice in an indefinite DZZD (Art. 363(d))

In an indefinite DZZD, any partner may terminate their participation by notice, given in good faith and at an appropriate time. The good faith requirement means the notice must not harm the interests of the other partners.

5. Court decision (Art. 363(e))

In a fixed-term DZZD, termination before the term may be effected by court decision for justified reasons (e.g. serious breaches by another partner).

6. Mutual consent

Although not expressly stated in Art. 363, under the general principles of the OCA, partners may terminate the partnership by mutual consent at any time.

Termination by mutual consent

The most common and straightforward way of termination. It requires:

• Consent of all partners.
• Preparation of a protocol/resolution for termination, signed by all.
• Determination of the manner and procedure for distributing assets.

Termination by notice in an indefinite DZZD

A partner in an indefinite DZZD may withdraw by notice (Art. 363(d) OCA). The law does not specify a minimum notice period, but requires that the notice be given:

• In good faith — without the aim of harming other partners.
• At an appropriate time — not at a moment when withdrawal would cause irreparable harm.

In a DZZD with two partners, notice by one leads to termination of the entire partnership.

Termination by court order

In a fixed-term DZZD, if there are justified reasons (e.g. systematic non-performance by a partner), any partner may request termination by court order (Art. 363(e) OCA).

The court assesses the specific circumstances and may order the termination of the partnership.

Step-by-step procedure

1. Occurrence of a ground for termination (consent, expiry of term, achievement of purpose, notice, or court decision).
2. Preparation of a protocol/resolution for termination (signed by all partners).
3. Completion of current contracts and obligations.
4. Inventory of assets.
5. Preparation of the final financial statements and tax returns (ATR under Art. 92 CITA).
6. VAT deregistration (if registered) — application within 14 days of termination. VAT is charged on remaining assets with used tax credit.
7. Distribution of assets between partners (voluntary or judicial partition).
8. Notification of NRA and NSSI.
9. BULSTAT deregistration — within 7 days of termination. Free of charge.
10. Closure of bank accounts.

Distribution of assets (partition)

Under Art. 364 OCA, a partner may claim their share of the joint property only upon leaving the partnership or upon its termination.

After termination, the joint property must be divided between the partners. Division may be through:

• Voluntary partition — by agreement between the partners. A distribution protocol is drawn up.
• Judicial partition — if the partners cannot agree, any of them may request partition through court proceedings.

The partition takes into account:

• Each partner's shares (as defined in the agreement).
• Non-monetary contributions that remain the property of the contributor (e.g. real estate).
• Everything acquired as a result of the joint activity.

VAT deregistration

If the DZZD is registered for VAT, mandatory VAT deregistration is required upon termination (Art. 107 VAT Act).

Deadline

The application for VAT deregistration must be filed within 14 days of termination (Art. 109 VAT Act).

VAT charge upon deregistration

Under Art. 111 of the VAT Act, upon VAT deregistration, 20 % VAT is charged on remaining assets (goods and tangible fixed assets) for which a tax credit was used.

Tax base upon deregistration

The tax base for VAT upon deregistration is the acquisition cost (or cost price), reduced by the accumulated depreciation for the normal economic life of the asset.

Only if this base cannot be determined is the market price applied (Art. 27(3)(2) VAT Act) as a subsidiary criterion.

Example: If the DZZD purchased equipment for BGN 10,000 (excl. VAT) and used the full tax credit, and accumulated depreciation is BGN 4,000, the tax base upon deregistration is BGN 6,000. VAT to charge = 6,000 x 20 % = BGN 1,200.

Tax consequences under CITA and PITDA

At the DZZD level — CITA

DZZD is a taxable person under Art. 2(2) CITA. Upon termination:

• DZZD files a final ATR under Art. 92 CITA.
• It pays 10 % corporate tax on the taxable profit for the final period.
• It prepares final financial statements as at the date of termination.

Upon distribution to partners

Distribution of assets upon termination is treated as dividend income for tax purposes:

Effective tax burden for individual partners

• 10 % corporate tax at the DZZD level
• 5 % withholding tax upon distribution
• Effective rate: approx. 14.5 %

Social security

Social security contributions of individual partners cease from the date of termination of the DZZD. Partners must file a declaration for cessation of self-insurance with the NRA.

BULSTAT deregistration

BULSTAT deregistration must be completed:

• Within 7 days of termination.
• The fee is free (EUR 0).
• Filed with the Registry Agency.

Required documents:

• Application for deletion from the BULSTAT register.
• Protocol/resolution for termination of the DZZD.

Notification of institutions

Upon termination of a DZZD, the following must be notified:

• NRA — regarding termination of the taxable person; filing of final returns.
• NSSI — regarding cessation of insurance of the partners.
• Banks — regarding closure of bank accounts.
• Counterparties — regarding completion of current contracts.

Timeline and deadlines upon termination

Specifics for DZZD formed for a public procurement

If the DZZD was formed for a specific public procurement, termination typically occurs after:

• Completion of all activities under the contract.
• Expiry of warranty periods.
• Settlement of all financial relations with the contracting authority.
• Release of the performance guarantee.

Do not rush termination if there are outstanding warranty obligations — the DZZD must exist as long as it can be called upon to perform.

Difference between termination and liquidation

For DZZD, there is no formal liquidation procedure as the Commercial Act provides for LLC and sole-owner LLC. The main differences are:

This difference makes DZZD termination faster and cheaper, but requires greater attention from the partners to settle obligations, as they bear personal liability.

Practical tips

1. Plan in advance. Terminating a DZZD requires coordination of tax, accounting, and legal actions. Begin preparation at least 1–2 months before the planned date.
2. Settle obligations before distribution. Distribute assets after settling all obligations to third parties, NRA, and NSSI.
3. Be careful with VAT deregistration. If you have assets with used tax credit, calculate in advance the VAT you will need to charge. The tax base is acquisition cost minus depreciation.
4. Observe the deadlines. 14 days for VAT deregistration, 7 days for BULSTAT — non-compliance may lead to sanctions.
5. If considering continuing the business, consider registering a sole-owner LLC or an LLC instead of a new DZZD.

Frequently asked questions

Conclusion

Terminating a DZZD requires careful coordination of civil law, tax, and administrative steps. Unlike an LLC liquidation, there is no formal liquidation procedure, which makes the process faster but demands greater diligence from the partners. The key deadlines — 14 days for VAT deregistration and 7 days for BULSTAT — must be strictly observed to avoid sanctions.

If you need assistance with terminating a DZZD, the team at Innovires Legal can guide you through every step of the process. Contact us for a consultation.

This article is prepared for informational purposes only and does not constitute legal advice. For a specific legal question related to your situation, please consult a qualified lawyer.