No group consolidation is permitted for tax purposes in Bulgaria. All companies must pay tax on the basis of individually assessable profits and losses.
Bulgarian law requires that taxpayers determine their taxable profits and incomes applying the arm’s-length principle to prices at which they exchange goods, services, and intangibles with related parties (transfer prices). Bulgarian transfer pricing rules generally follow OECD Transfer Pricing Guidelines.
Transfer prices are not set in compliance with the arm’s-length principle where:
- prices of the supply of goods or services differ from the market prices or
- loans are received or granted against an interest rate that differs from the market interest rate effective at the time the loan agreement is concluded.
The market interest rate is defined as the interest payable under the same conditions for a loan provided or received, notwithstanding the form of the loan, between non-related parties. The market interest is determined according to the market conditions.
The taxable person should be able to evidence that its relations with related parties are in line with the arm’s-length principle.
For the purposes of transfer pricing rules, market prices are determined by the following methods:
- Comparable uncontrolled price method.
- Resale price method.
- Cost plus method.
- Transactional net margin method.
- Profit split method.
Recently, the revenue authorities are increasingly focusing on the transfer pricing area.
As of 2020, preparation of transfer pricing documentation justifying the arm’s-length nature of related-party transactions is mandatory under certain conditions.
Bulgarian entities, as well as foreign entities acting through PEs in Bulgaria, which participate in cross-border related-party transactions and meet certain criteria (exceed certain thresholds), will be required to prepare transfer pricing documentation, comprising:
- a Local file and
- a Group Master file (if the company is part of a multinational group).
The contents of the documentation are explicitly listed in the Bulgarian Tax and Social Security Procedure Code.
The first year for which a Local file should be available is 2020 (with a deadline for preparation of the file by 31 March 2021).
Currently, there is no possibility to obtain an Advance Pricing Agreement (APA). However, it is possible to obtain an opinion from the revenue authorities on a case-by-case basis. Such opinions are not binding, but they may provide protection from assessment of interest for late payment and penalties.
Mandatory country-by-country (CbC) reporting obligations and notification requirements
The following entities have the obligation to submit CbC reports to the National Revenue Agency (NRA):
- An ultimate parent company of a multinational enterprise group (MNE group) that is a tax resident in Bulgaria (if the consolidated group revenue exceeds BGN 100 million in the year preceding the reporting fiscal year). No CbC report is required for FY2019.
- A Bulgarian subsidiary or a PE of an MNE group, with consolidated group revenue exceeding BGN 1,466,872,500 (EUR 750 million) in the year preceding the reporting fiscal year when:
- the Bulgarian tax administration does not have an available mechanism to receive the CbC reports filed by the ultimate parent entity of the MNE group or another designated reporting group entity, or
- the MNE group has appointed the Bulgarian subsidiary/PE to act as a surrogate parent company or on behalf of all EU group members, subject to the requirements envisaged in the law.
The CbC reports shall contain certain types of financial information, as well as information on the business activities of all group entities.
The reports will be automatically exchanged between the EU member states or other jurisdictions with which Bulgaria has signed international agreements. An exception exists for the reports submitted by MNEs with group revenue exceeding BGN 100 million whose ultimate parent company is a Bulgarian tax resident, which will not be subject to the automatic exchange of information with other jurisdictions.
The first year for which CbC reports should have been filed by Bulgarian ultimate parent companies or surrogate parent entities was fiscal year (FY) 2016. In the other cases, the first reporting year was FY 2017.
Bulgarian tax residents that are part of an MNE group shall notify the NRA of the group entity that will submit the CbC report. The notification deadline is the last day of the reporting fiscal year of the MNE group.
The first year for which CbC notifications should have been submitted was FY 2016 (the notification deadline for FY 2016 was 31 December 2017).
Interest payable by local companies to local or foreign persons may be restricted by the thin capitalisation rules (which also apply to interest due to non-affiliated companies).
The tax deductibility for interest expenses that exceed interest income is restricted to 75% of the accounting result of the company, exclusive of interest income and expense. If the accounting result of the company before including the effect of the interest income and expenses is a loss, none of the net interest expense will be deductible for tax purposes. Interest on bank loans and interest under financial lease agreements are subject to thin capitalisation regulations only when the agreements are between related parties or guaranteed by or extended at the order of a related party.
The thin capitalisation rules do not apply if the debt-to-equity ratio does not exceed 3:1 for the respective tax period.
Interest expenses restricted in a given year under the thin capitalisation rules may be deducted from the financial result for tax purposes during the following years (as of January 2019, the previously existing five-year carryforward term has been removed). This reversal may be made up to the tax allowed interest expenses, as per the above formula (considering also potential limitations in the deductibility capacity under the interest limitation regime, where applicable).
Where both the borrower under a bank loan or financial lease, and its related party provide a guarantee or collateral, interest costs will not be regulated if the own guarantee / collateral provided by the borrower, is sufficient to cover the whole bank loan / lease.
Controlled foreign companies (CFCs)
A CFC regime has been introduced for the first time in Bulgaria as of 1 January 2019.
Undistributed profits of low-taxed foreign subsidiaries (and PEs) shall be included in the tax base of the Bulgarian controlling entity, subject to 10% Bulgarian CIT. Certain exemptions apply, including that profits of CFCs with substantive economic activity will not be taxed in Bulgaria.
A foreign entity or a PE is treated as a CFC if it meets the controlling interest test (generally defined as more than 50% of voting rights, capital, or entitlement to profits) and a low-taxation test.
Certain measures apply to avoid double taxation (e.g. tax credit for foreign tax paid by the CFC abroad, measures in case of subsequent dividend distribution).
As of 1 January 2020, new exit tax rules are introduced in accordance with the EU ATAD (Anti-Tax Avoidance Directive).
The transfer of assets or activities outside of Bulgaria (but within the same enterprise), may be subject to Bulgarian corporate income tax in the following scenarios:
- from a Bulgarian head office to a permanent establishment (PE) abroad,
- from a Bulgarian PE to a Head office / another PE abroad,
- transfer of assets / business in case of redomiciliation (change of the tax jurisdiction) of a Bulgarian company in certain cases,
where Bulgaria ends up losing taxing rights on any subsequent disposals of the assets / business.
Exit tax is levied on the excess of the market value of the assets / business over their tax value at the time of the transfer. If the result is a capital loss, it is tax-deductible.
Special rules are introduced in certain circumstances of transfers (e.g., of temporary nature).
The existing rules on transfer of services between a PE and a Head office in Bulgaria and abroad, are slightly amended.
Hybrid mismatch rules
As of 1 January 2020, hybrid mismatch rules are introduced based on Directive 2017/952/EU or the so called “ATAD II”.
The new rules aim to counter tax avoidance based on different characterization of tax items between two or more jurisdictions. The regime is applicable:
- between related parties,
- between a Head office and a PE / between two PEs,
- in very limited cases between non-related parties.
Hybrid mismatches include situations, where:
- the same costs are tax deductible in two or more jurisdictions (the so called “Double deduction”), or
- tax deductible expenses / payments / losses in Bulgaria do not lead to taxable revenue in the hands of the recipient abroad (the so called “Deduction without inclusion”).