Bulgarian TP rules largely follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The OECD TP guidelines). The formal introduction of transfer pricing regulations into Bulgarian legislation began in the early 2000s, while the mandatory documentation requirements following the OECD model became effective in 2020.
Currently, the transfer pricing rules in Bulgaria are governed by the Corporate Income Tax Act (CITA) and the Tax and Social Security Procedures Code (TSSPC).
Arm’s Length Principle
Bulgaria follows the arm’s length principle based on Article 9 of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines. Article 15 of the Bulgarian Corporate Income Taxes explains that if related persons conduct business in a way that affects the taxable amount, using terms different from those used by independent parties, the taxable amount will be adjusted and taxed as if the transactions were between unrelated persons.
Related Party Definition
Related party definition has been developed in the Tax and Social Security Procedures Code, which stipulates that include family members such as spouses, direct relatives (parents, children, grandparents), relatives up to the third degree (siblings, aunts/uncles, nieces/nephews), and in-laws up to the second degree. It also includes employers and employees in a direct employment relationship, as well as business partners engaged in partnerships.
Furthermore, the Bulgarian legislator has provided the meaning of Control, as constituting significant influence of one party over another’s operations, either through ownership, management, or contractual agreements. This includes direct or indirect ownership of more than 50% of voting rights, the ability to appoint a majority of board members, or managing the company’s activities through legal or contractual authority. Control may also arise if a shareholder, through agreements with others, secures a majority of votes in the general meeting or can otherwise significantly influence decision-making within the company.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Bulgaria are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
In Bulgaria, the determination of transfer prices followed a specific hierarchy of methods, with the Comparable Uncontrolled Price (CUP) method being favored. However, following the alignment with OECD guidelines, the selection of the method is based on the most appropriate principle.
Comparability Analysis
In Bulgaria, the guidelines for comparability analysis from Chapter III of the OECD Transfer Pricing Guidelines (TPG) are generally followed. The Bulgarian transfer pricing rules require considering five key factors when analyzing comparability, one of which is the economic environment.
Local (domestic) comparables are preferred because they are usually more reliable, as it is difficult to find foreign markets with similar economic conditions. However, if there are not enough suitable local comparables, foreign ones can be used.
If the analysis reveals significant differences between the controlled transaction and the comparable uncontrolled transaction, adjustments must be made in a reliable way to ensure a sufficient level of comparability.
Documentation Requirements
Transfer pricing documentation requirements in Bulgaria are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Bulgarian tax authorities:
- Master file;
- Local file; and
- Country-by-Country (CbC) report.
Since January 1, 2020, Bulgaria has required certain companies to prepare transfer pricing documentation. A local file is mandatory if a company meets at least two of the following: net sales over BGN 76 million (€38 million), assets exceeding BGN 38 million (€19 million), or more than 250 employees. However, documentation is only needed for controlled transactions exceeding BGN 400,000 (€200,000) for goods, BGN 200,000 (€100,000) for services, or BGN 1 million (€500,000) for loans and BGN 50,000 (€25,000) for interest. Transactions between a foreign entity and its Bulgarian PE also fall under these rules, while transactions within Bulgaria are exempt.
Companies in a multinational group that must prepare a local file also need a master file, which can be provided by the parent company or another group member. The local file must be ready by March 31 of the following year, and the master file within 12 months after that. Annual updates are required, though benchmarking studies can be renewed every three years if market conditions remain stable.
Country-by-Country Reporting
In Bulgaria, Country-by-Country (CbC) reports must be filed within 12 months after the end of the multinational enterprise’s (MNE) tax year. The content of the report follows the BEPS Action 13 guidelines without any differences.
Country-by-Country (CbC) reporting in Bulgaria applies to multinational groups with consolidated revenue exceeding BGN 1.47 billion (€750 million) if the ultimate parent entity (UPE) is not Bulgarian, and to groups with revenue over BGN 100 million if the UPE is Bulgarian. Companies must notify the tax authority by year-end and file the CbC report electronically within 12 months.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
In Bulgaria, Advance Pricing Agreements (APAs) are not available, meaning taxpayers cannot get prior approval from tax authorities on their transfer pricing methods. However, Bulgaria also follows EU Directive 2015/2376 and this says that when countries are exchanging tax ruling decisions and advanced partnership agreements they reach about avoiding double tax among themselves.
The Mutual Agreement Procedure (MAP) in Bulgaria is a method for resolving tax disputes arising from the interpretation or application of tax treaties, particularly those involving transfer pricing and anti-abuse provisions. If a taxpayer faces a tax dispute related to a treaty, they can request MAP assistance by contacting the National Revenue Agency (NRA). The request should be directed to the Director of the Tax Treaties Directorate, either through email or post. Taxpayers always have the option to use MAP no matter what other legal processes they are also pursuing in their own country. MAP is modern and quick which can be an easy way to go.
Approach to Transfer Pricing Audits
In Bulgaria, the National Revenue Agency (NRA) conducts transfer pricing audits to verify if transactions between related companies follow the “arm’s length” principle. This principle means that the prices set between these companies should be similar to what independent businesses would agree on. Under Bulgarian law, the Central Bank’s National Bank of Romania must notify the company that is subject to the audit and must give it at least 14 days to prepare any necessary papers and to explain what’s going on.
Penalties
In Bulgaria, failing to submit a CbC report on time can result in a fine of BGN 100,000 to BGN 200,000. If the report contains incorrect or incomplete data, the fine ranges from BGN 50,000 to BGN 150,000. This also applies if the Ultimate Parent Entity refuses to provide the required data. A Constituent Entity must notify the tax authorities if the Ultimate Parent Entity refuses to provide data or face a BGN 10,000 fine. Not notifying them about who filed the report will lead to a fine of BGN 50,000 to BGN 150,000.
Failing to prepare a Local file may result in a fine of up to 0.5% of the transaction value, and lacking a Master file can incur a fine between BGN 5,000 and BGN 10,000. Incorrect or incomplete transfer pricing data can lead to fines of BGN 1,500 to BGN 5,000.
Taxation at a Glance
Bulgaria is a member of the European Union (EU) and must follow EU laws, including those related to taxes and cooperation. At the national level, both corporate earnings and personal incomes are taxed, with no added state and provincial taxes charged either. However, local taxes, like property tax, may apply in certain cases. Bulgaria taxes all types of income, with some exceptions where income is subject to a final withholding tax.
The official name of the Bulgarian tax authority is the National Revenue Agency.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 10% |
VAT | 20% |
Withholding tax on dividends to non-residents | 5% |
Withholding tax on interest to non-residents | 10% |
Withholding tax on royalties to non-residents | 10% |
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