Transfer pricing - Bulgaria

• The Bulgaria’s transfer pricing (TP) legislation is based on the arm’s length principle as per Article 9 of the OECD Model Tax Convention on Income and Capital, i.e. it follows the OECD Guidelines.
• The TP legislation in Bulgaria is:
  • Article 15 of CITA (establishes the principle of independent market relations);
  • the Tax and Social Security Procedure Code (TSSPC) Chapter Eight "a" (New, SG No. 64/2019, effective 1.01.2020) TRANSFER PRICING DOCUMENTATION;
  • Article 116 of the TSSPC and § 1 item 10 of the Additional Provisions of the TSSPC (establishes the methods for determining market prices);
  • Ordinance № N 9 on the procedure and methods for applying the methods for determining market prices (TP Guidelines in Bulgaria).
• The TP rules apply to Bulgarian taxpayers (Bulgarian entities, including Bulgarian non-residents with Bulgarian permanent establishment) There is a self-assessment regime, i.e. the onus is on the taxpayer to confirm its transfer pricing meets the standard or to adjust its tax return accordingly.
• The filing of transfer pricing documentation with National Revenue Agency (NRA) is not mandatory, but because of the self-assessment regime, transfer pricing analysis and documentation is required to help protect against penalties. The TP documentation (local file) is submitted to the Tax Authorities upon request, within 14 days of request, in the course of a tax audit.
• The OECD’s Master File and Local File concept is regarded as best practice, applied in Bulgaria.
• In addition, for larger groups (over €750m) Bulgaria has implemented CbCR (Country by Country Reporting) and Notification Obligation from multinational group of undertakings.
• CbC Filing Deadline - Within 12 months of year end for the ultimate parent of the group. CbCR must be filed electronically through the respective electronic services on the NRA website no later than 12 months after the last day of the reporting fiscal year of the MNE group.

• The Bulgaria’s transfer pricing rules generally follow the OECD Guidelines although there is no explicit reference in the relevant legislation. 

• The most appropriate pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods applied in Bulgaria are (§ 1, item 10 of the Additional Provisions of the TSSPC):
  • comparable uncontrolled price,
  • resale price,
  • cost plus,
  • transactional net margin,
  • profit split methods.
• All the methods must be used in line with the functional and risk profile of the entity.
• While Bulgarian legislation refers to the 2017 OECD Guidelines and BEPS Actions 8-10 Final Reports published by the OECD on 5 October 2015, Ordinance No.  N -9 explicitly establishes a hierarchy, prioritizing traditional transactional methods over profit-based methods. In practice, the comparable uncontrolled price method is often preferred when reliable data is available. Still, the profit-based methods are common and are well accepted by the tax authorities.

• The analysis of transfer pricing will allow the companies to determine whether the profit is properly distributed between the individual companies in the group and whether each country in which the group company is located has received its due fair share of consolidated profits.
  • TP documentation supports the process of creating a tax culture;
  • It enables the taxpayer to defend his tax position;
  • Gives confidence to tax administrations that taxpayers are:
    • performed the necessary analysis of their tax position;
    • analyzed the relevant comparable data;
    • achieved a consistent and reasonable market price for tax purposes.
• The requirements for up-to-date documentation give guarantees that the prices are set one by one fair way, limiting the ability to set prices after completion of transactions.

• Bulgaria accepts the OECD transfer pricing documentation model based on the Master File and Local File (BEPS Action 13) approach. This approach is considered best practice in  Bulgaria.
• Mandatory transfer pricing (TP) documentation in Bulgaria, consisting of a local and master file, became a requirement following amendments to the TSSPC approved by the National Assembly. Compliance is mandatory from the 2020 tax year onward.
• Companies concerned: Bulgarian taxpayers which, as of 31 December of the previous year, exceeded at least two of the following indicators:
  • BGN 38 million (approximately EUR 20 million) book value of assets;
  • BGN 76 million (approximately EUR 40 million) net sales revenue;
  • average number of the personnel for the reporting period of 250;
  • are obliged to prepare a local file.

Affected controlled transactions

• A local file shall be prepared each year for related party transactions exceeding the following annual thresholds:
  • BGN 400,000 for sales of goods (approximately EUR 205,000);
  • BGN 200,000 for other transactions (approximately EUR 103,000);
  • BGN 1 million loan principal (approximately EUR 512,000) or BGN 50,000 interest (approximately EUR 26,000) and other related to the loan revenue or expenses.

Taxpayers which are part of a multinational group of companies and are obliged to prepare a local file must also have available a master file prepared by the ultimate parent company or another member of the group.

Deadlines for preparation

• The deadline for preparing the local file aligns with the deadline for submitting the annual CIT return for the respective year and the deadline for the master file is within 12 months after this term. For example, the local file for 2024 shall be prepared by 30 June 2025 (with the option for an extension until 30 September 2025 in case of an amending CIT return). The master file for the fiscal year of the ultimate parent enterprise of a MNE must be prepared by no later than 12 months after the deadline for the local file, therefore the master file for 2024 must be available by 30 June 2026.
• The TP documentation is not required to be submitted before the revenue authorities. The documentation is to be kept by the taxpayer and must be available upon request from the tax authorities or in the course of a tax inspection or a tax audit. Administrative sanctions are laid down for failure to present the TP documentation upon request and for presenting incorrect or incomplete data and can be substantial.
• Lack of carefully prepared documentation will generally be seen as (at least) “careless” behavior and any adjustment will likely result in penalties.

LOCAL FILE CONTENT (summarized):

• Information about the entity;
• Information on the controlled transactions subject to the local file requirement;
• Financial information.

MASTER FILE CONTENT (summarized):

• A description and diagram/chart illustrating the MNE’s organizational structure, a list of all related parties in the group, as well as the jurisdictions in which each of them is resident for tax purposes, or, when not a resident of any jurisdiction, the jurisdiction under whose legislation it is created;
• A brief description of the MNE’s business(es);
• A brief description of the related-party transactions;
• The  group’s transfer pricing policies, or a description of the group’s transfer pricing method that proves the arm’s length character of the prices of the controlled transactions;
• A brief description of the most important service arrangements between members of the MNE group, other than contracts for services in the field of research and development;
• A description of the main geographic markets for the group’s products and services;
• A brief functional analysis describing the contributions to value creation by individual entities within the group;
• A description of important business restructuring transactions, acquisitions, and divestitures occurring during the fiscal year;
• A description of the business strategy, as well as any changes that occurred compared to the previous taxable year;
• Information regarding intangible assets;
• Information related to the group’s financial intercompany activities;
• The group’s financial and tax positions.

• Risk analysis and assessment of a high level:
  • Identification of potential risk;
  • Assess the scale of the problem;
  • Prioritize this risk among many other risks.
• NRA strategy for counteracting the risk from transfer to profits:
  • Building administrative capacity;
  • Creating a sustainable process to deal with this risk;
  • Providing a budget.

TP documentation

• In case of failure to submit the TP file by a taxpayer to the tax authorities, a penalty of 0.5% of the total amount of transactions that should have been documented may be imposed. It will be considered that a local transfer pricing file has not been prepared when such file is not provided to that Bulgarian tax authorities upon their request and within the course of audit inspection.
• If a taxpayer fails to submit the master file, a penalty between BGN 5,000 and BGN 10,000 may be imposed.
• Finally, in case of the submission of incomplete or incorrect data, the penalty ranges from BGN 1,500 to BGN 5,000.
• The amount of the penalties may be doubled in case of repeated failure to meet the requirements for preparation of transfer pricing documentation.

CbCR:

• A company which fails to submit a CbCR, shall be punished with a penalty payment in the amount of BGN 100,000 to BGN 200,000, and for a repeated infringement – from BGN 200,000 to BGN 300,000.
• A company which fails to specify or specifies incorrect or incomplete data or circumstances in the CbCR, shall be punished with a penalty payment in the amount of BGN 50,000 to BGN 150,000, and for a repeated infringement – from BGN 100,000 to BGN 250,000. This punishment shall be also imposed in cases where incomplete or incorrect data are due to refusal by the ultimate parent undertaking to provide information.
• A composite undertaking which fails to fulfil the notification obligation under Article 143y from TSSPC, shall be punished with a penalty payment amounting from BGN 50,000 to BGN 150,000, and for a repeated infringement – from BGN 100,000 to BGN 200,000.

• Bulgarian legislation:
  • Article 15 of CITA;
  • §1 item 8 of the Additional Provisions of the TSSPC;
  • Articles 5 and 6 of Ordinance № N 9.
• Transfer pricing analysis is not possible without reliable market data on comparable elements (companies or transactions).
• The search for comparable elements is one of the most difficult tasks in transfer pricing, due to the lack of ideal comparability, expensive access to databases and market information, lack of transactions similar to transactions between related parties to exist between independent parties.
• Sources of market information:
  • Internal comparable elements are the perfect (but rare) comparability;
  • External comparable elements;
  • Information stored in the Registry Agency;
  • External private databases AMADEUS ORBIS, TP Catalyst BvD, DIANE OneSource, OSIRIS, Loan Connector, Royaltystat KOMPASS, ACIDS, KV RISKCALC, FAME, ODIN;
  • Publications, reviews, analyzes on the Internet;
  • Statistical information of the BNB, NSI and other institutions;
  • Stock exchange bulletins and publications on stock exchange prices in specialized publications;
  • Specialized and branch publications.
• Concept and Approaches to Price Regulation:
  • Principle of independent market relations (arm’s length principle);
  • Comparability analysis;
  • Transfer pricing methods;
  • Pricing approaches for specific transactions;
  • The principles enshrined in the OECD Guidelines further develop the rule of Art. 9 of the OECD DTT Model, followed by Bulgaria in negotiations for concluding bilateral DTTs.

• No APA opportunities or binding ruling is currently applicable.
• Taxable entities are allowed to file a request for a written opinion from the National Revenue Agency or the Minister of Finance on the interpretation and application of the tax law regarding a specific tax issue. However, the value of the position of the tax authorities on a particular tax aspect is very limited as the tax authorities refuse to provide any opinion about transactions that have not been yet structured and documented.
• There are opportunities for availability/access to MAP.

Companies which are exempt from preparing a local file:

• Bulgarian taxpayers which, as of 31 December of the previous year, do not exceed two of the following thresholds:
  • BGN 38 million (approximately EUR 20 million) book value of assets;
  • BGN 76 million (approximately EUR 40 million) net sales revenue;
  • average number of the personnel for the reporting period of 250.
• Entities which are not subject to corporate income tax (CIT).
• Entities which are subject to alternative taxes.
• Entities performing only related party transactions within Bulgaria.
• Regardless of whether a company is required to prepare a local file, all related-party transactions must adhere to the arm’s length principle, as mandated by Article 15 of the Corporate Income Tax Act (CITA). Furthermore, entities that are part of multinational enterprise (MNE) groups must have a master file available, even if they are exempt from preparing a local file.

• N/A.

• N/A.

• Tax authorities are becoming increasingly vigilant regarding transfer pricing matters, demonstrating heightened scrutiny and interest in recent years. The number of transfer pricing inquiries and disputes has risen significantly, reflecting a growing focus on compliance and enforcement.