Government Bonds and How They Are NOT Taxed

Hello, Tax Hackers! I'm Marina Muchakova, tax consultant at Vesta Consult!

What are government securities?

Government securities are financial instruments issued by a country's government to finance its operations or projects. They are typically used to attract capital and are considered risk-free investments because the government guarantees to return the full amount to the investor when the securities mature.

Types of government securities

1. Debt bonds: Government securities with fixed income and a set maturity date. The investor receives interest on their investment at regular intervals.
2. Treasury bills: Short-term government securities with very short maturities, used for short-term government financing.
3. Reserve shares (Treasury Stock type): Ordinary government shares in public companies, used to finance or control those enterprises.
4. Indexed bonds: Government securities whose payments are adjusted according to inflation or another index. They provide protection against inflation and guarantee real income.

For more information, I recommend visiting the websites of financial institutions, national banks and stock exchanges in your country. They usually provide detailed information and statistics on government securities.

Taxation of government bonds in Bulgaria for individuals

In Bulgaria, government securities are NOT taxed for individual investors when traded on:

• Bulgarian Stock Exchange (excluding transactions through Tradegate, which is NOT a regulated market!)
• Growth Market (Beam market for SMEs)
• Regulated markets in the EU and EEA, listed in the ESMA registers and falling within the meaning of Art. 152 of the PFIA (MiFID 2).

Legal framework — bond coupons and discounts

Coupons and discounts on bonds are exempt from taxation on the basis of:

• Art. 13, para. 1, item 3 of the PITA, in connection with §1, item 11 of the additional provisions
• Para. 1, item 9 (coupons and discounts on bonds)
• Art. 37, para. 1, item 3
• §1, item 7 of the additional provisions of PITA
• §1, item 11 of the additional provisions of PITA
• §80, para. 1 of the transitional and final provisions of PITA
• §1, item 11, letter a) of the additional provisions of PITA
• §80, para. 2 of the transitional and final provisions of PITA

Note that some government securities, which are generally a separate asset class, are actually bonds — so the bond regulations cited here apply to them accordingly.

Summary: Government Securities

• Government securities traded on regulated markets in Bulgaria/EU/EEA — not taxed for individuals
• Coupons on government securities in Bulgaria/EU/EEA — not taxed when the securities are bonds

Non-taxable income from bonds

Regarding bonds (excluding government securities):

• The discount is not taxed, because it replaces interest income.
• Coupon interest is not taxed, regardless of whether it is paid regularly or in a lump sum at the end of the period.

What is a bond discount?

A bond discount has no definition in law, as most financial assets do not. We therefore look at what it usually means — the bond is sold at a price lower than its face value. This typically happens when the bond's interest rate is lower than the current market rate.

For example: a bond with a face value of BGN 1,000 and an interest rate of 5%. If the market rate rises to 7%, new bonds will offer higher returns and the market price of your bond will fall. You may find you need to sell it at a discount — say for BGN 900 — to make it attractive to a buyer who would prefer the higher-yielding new bond.

When the bond is redeemed by the issuer at face value, the investor realises a capital gain equal to the difference between the purchase price and the face value. Since the discount compensates for interest, it has been exempted. It is also important to note that this is a special case of a capital gain, which in principle is taxable for bonds.

Since under Bulgarian tax procedure law the burden of proof is shifted, if we are to justify why we do not tax the discount, we must prove that it is indeed a discount and not a capital gain. The burden is on us.

Clear enough? Happy Valentine's Day — from me, on crutches!

Best regards,
Marina Muchakova