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SOVEREIGN MAN

Where taxes are so low, some people might actually pay…

July 5, 2011
Sofia, Bulgaria

Do you remember those days, 25+ years ago, when the Olympic games were an extension of the Cold War? We heard stories about these Soviet athletes who were groomed, practically from birth, to become champion athletes, taken from their families at a young age to live and train nonstop for the glory of the Communist Party.

RUSU1827 193x300 Where taxes are so low, some people might actually pay...

Bulgarians historically excelled at summer sports like boxing, wrestling, track & field, and rowing, and today I worked out at a gym that used to house the country’s up-and-coming athletes during Soviet rule.  It’s in a neighborhood of old Soviet-era apartment buildings, all built in that concrete shoebox style that defined Communist architecture.

Such neighborhoods are a constant reminder of the days when they allowed their society to descend into a totalitarian police state. A lot of Bulgarians I’ve encountered seem embarrassed by these Communist remains, brushing the entire period off as ‘experiments in socialism.’

They’re looking to the future now, and they’re cautiously optimistic.

When you survey the various countries in the former Soviet bloc, it’s a truly mixed bag. East Germany, for example, enjoys a lavish economy after being successfully reunited over 20-years ago thanks to an incredible amount of aid and support from the West.

Slovakia has spent the last two decades creating a manufacturing powerhouse for the rest of Europe, and its citizens today enjoy a much higher standard of living than before.

Estonia built a very successful knowledge and services economy by establishing a limited, low-tax, business-friendly government. When Mart Laar took over as Prime Minister after Estonia’s independence in the 1990s, the only economic text he had ever read was Milton Friedman’s Free to Choose. It’s fortunate for his country that it wasn’t Keynes.

Belarus descended even further into totalitarianism; Aleksandr Lukashenko, the country’s first democratically elected president since the fall of the Soviet Union, has remained in power ever since, effectively seizing dictatorial control over every aspect of the economy and society.

Ukraine continues to vacillate between revolution, corrupt cronyism, and economic collapse… yet the country still has a lot of potential thanks to its resource wealth and talented young work force.

Bulgaria, from where I write this letter, is an interesting case. As the poorest member of the EU, there is a lot of opportunity at face value. Labor is dirt cheap. Property is dirt cheap. Living costs are a joke. English is widely spoken and is, in fact, more prevalent than Russian in the capital city.

More importantly, the government is finally beginning to privatize some of its state-owned companies, as well as make some business-friendly decisions related to taxes.

Now, this is not a part of the world where tax compliance is particularly strong. The immediate post-Soviet years turned the entire region into a veritable Deadwood, and devoid of any functioning tax authority, people got used to dealing in all cash and keeping 100% of their earnings.

Several governments, including Russia, Ukraine, and Bulgaria, have tried to make compliance easy by slashing tax rates. At just a 10% flat rate for corporate, individual, and capital gains, and just 5% on dividends, taxes in Bulgaria are now so low that some people might actually pay.

For foreigners, it’s a boon. Bulgaria has an extensive network of tax treaties with countries across Western Europe, Canada, and the United States which ensure foreign-owned Bulgarian companies are only subject to the 10% rate.  Using this ‘tax rate arbitrage,’ multinationals keep a large part of their earnings offshore in lower tax jurisdictions.

At present, a number of multinationals have set up overseas headquarters and manufacturing facilities in Ireland to take advantage of that country’s low tax rate of 12.5%.  Given Ireland’s pending bankruptcy, however, the government is under pressure to raise this rate… and I expect that this will drive a number of companies to move operations to Bulgaria.

Given the country’s low tax rates, cheap minimum wage of just $185/month, and business-friendly policies, Bulgaria is a reasonable alternative for companies that want to stay within the EU’s customs union. Bulgaria is, after all, an EU member… though they likely fabricated their financial statements to gain entry in the same way that Greece did.

Simply put, Ireland’s decline will be Bulgaria’s gain, and the influx of foreign investment will be of great benefit to this economy and asset prices.

Meanwhile, entrepreneurs and investors looking to capitalize on offshore tax treaty advantages, cheap talent, and a cost effective European base may want to consider Bulgaria for their needs.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • BENJAMINW

    Simon, 

    Hey, nothin’ but love for ya, man.

    May I offer a niche opinion, regarding your recent Sovereign reviews of various countries?

    One major area of personal sovereignty is: family sovereignty.  A Sovereign Man must have freedom, not just in the economic realm, not just in the political realm, but most especially in the family realm.

    On that note, Bulgaria and Andorra, to my limited knowledge, are not areas of educational freedom.  You cannot home educate, for example.

    If a man cannot have freedom, and make his own choices, regarding the ideas and values by which his sons and daughters are raised, then he has no freedom at all… because, his own children will overturn that “Sovereign” man’s accomplishments, within 20 years.

    The only places where a man’s home is his castle, the only place where he has freedom, is where his wife and his children are his own… and where the state is not involved in using them as pry-bars to destroy his family and his wealth.  So, confiscatory divorce/domestic laws and compulsory government indoctrination (so-called “education”) must be at the top of every list that describes countries where Sovereign Men might want to re-locate.

    Peace to you, Simon,

    Benjamin

    • diyanaalcheva

      Hi Benjamin,

      I am Bulgarian and while I did go to school, I know that the country has uneducated kids roaming around.

      I would assume that then there also can be kids staying home and be home schooled without the need to go to school. Not sure that it is law that one can only get education in the school institutions. I did in fact go to many private lessons that my parents paid for, all throughout my school years, for instance to improve my English. Many of my English teachers came at home. I’ve had private math and literature teachers come home, and I’ve visited their homes, when I had to prepare for national exams.

      I really doubt that there’s any law preventing parents who want to home school from doing so. I might be wrong. I don’t think it’s common, but I doubt that it is unacceptable if one chose to do it that way.

      Didi

      • Mat

        Hi Didi,

        It is indeed specifically against the law to home school in Bulgaria – you can of course have additional classes at home or elsewhere as you did, but for your main education, you have to be in a state school.  There are about 100 kids in the country home schooled, usually due to physical or mental handicap issues.  That said, changes are coming in many ways here as the old generation brought up under communism get replaced by younger people more willing to listen to new ideas.

        But back onto the low tax issue – its a great headliner but if Singapore can’t make it with a 10% tax rate, how is Bulgaria going to, with all the investments that it needs? Getting companies to set up corporate offices doesn’t bring in a lot of jobs.  Despite having such a low tax rate for more than 2 years, hardly anyone has actually moved there corporate HQs here…

        But anyway, the sun is shining and the girls are pretty so I’m off to enjoy both

      • http://www.facebook.com/glennarcaro Glenn Arcaro

        Hey there Matt.  On your question about how Bulgaria is going to make it at a 10% flat rate, I think that’s what Simon was getting at when he was speaking of Ireland’s eventual crash.  Many of the big corps that are there now because of the low rate will be driven out and into Bulgaria.  

        Sounds like that was Simon’s thought anyway…  

    • DD

      hmm a wife and children are not property and i have to wonder about the type of education your poor children would be subjected to with this kind of mindset. Equally disturbing is that 11 more liked yre comment. Did I stumble on some fundie site where ‘control’ equates freedom? I am all for limited gov but not at the expense of exploiting woman and children. Perhaps Iran or similar countries are a good fit for you Benjamin – I am sure your control issues will be satisfied there. I was really hoping that Sovereign Men means Sovereign people but I guess that there are still some stone age mind sets out there…rather disappointing I must say.

  • Sean Brennan

    I haven’t done a lot of analysis, but this sounds a lot like Albania.  They have a flat tax of 10% for individuals and corporations and average incomes are quite low.  

  • USKiwi

    I just worked out how much tax I paid back to the NZ government in taxes this past year as is it refund season and I paid a total of 14.2% of my total income back to the government.

    The absolute lowest I was ever able to pay in the US after factoring in SS, medicare, etc. was 22% in a state without income tax.

    I have no idea why people think this place is some sort of socialist paradise.  I am more free of government involvement in my life here than I ever was in the US.

    • Cjohnsondies

      i feel the exact same!  i am a US citizen living and working in dubai, and now after almost 4 years out of the country i can’t imagine ever going back!

  • byrresheim

    “Such neighborhoods are a constant reminder of the days when they allowed their society to descend into a totalitarian police state.” 
    Sir, they did allow strictly nothing of the sort, however the paragons of freedom and democracy did. Please take the time to look up Yalta.

    Apart from that: a wonderful hint to research for better places than the high tax environment we are confronted with, thank you.

  • http://www.facebook.com/jay.twila Jay Twila

    Bulgaria’s main asset is also it’s main liability: The European Union.

  • http://health-fitness-solutions.blogspot.com Michael Paladin

    I wonder what the economic reasoning is for taxing dividends at a lower rate than capital gains.

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