Tax Planning & Optimisation

Corporate Taxation

Bulgaria applies a 10% flat corporate tax under the Corporate Income Tax Act (CITA) — the lowest rate in the EU (the EU average is approximately 21%). This rate has been in effect since 2007 and is one of the key factors attracting foreign investment.

Key Characteristics

• Flat rate — 10% with no thresholds or progressive scales, ensuring predictability
• Broad tax base — the tax financial result is formed by adjusting the accounting financial result (Art. 22 CITA)
• EU compliance — full compliance with EU tax directives (Parent-Subsidiary, Interest-Royalties, Merger)
• Eurozone from 2026 — accession to the eurozone does not change tax rates but increases predictability for international investors

Tax Adjustments

Effective tax planning requires in-depth knowledge of permanent and temporary tax differences under Chapter VII CITA. Key areas for optimisation include:

• Depreciation policy — tax depreciation rates (Art. 55 CITA) vs accounting depreciation
• Provisions and impairments — different tax treatment (Art. 34-37 CITA)
• Interest expenses — thin capitalisation restrictions (Art. 43 CITA) and the interest limitation rule (Art. 43a CITA, implementing ATAD)
• Entertainment expenses — subject to tax on expenses under Art. 204 CITA

Transfer Pricing

Transfer pricing is regulated under Chapter 8a of the TSIPC (Art. 155a-155g) and is a key instrument for controlling transactions between related parties. Non-compliance with the rules may result in significant adjustments and penalties.

Arm's Length Principle

All transactions between related parties must be conducted under conditions that do not differ from conditions between unrelated parties in comparable circumstances (arm's length principle). For this purpose, 5 OECD-approved methods are applied:

• Comparable Uncontrolled Price method (CUP) — comparison with prices in similar transactions between independent parties
• Resale Price method — deduction of a customary margin from the resale price
• Cost Plus method — addition of a customary margin to costs
• Transactional Net Margin Method (TNMM) — analysis of net profit relative to an appropriate base
• Profit Split method — allocation of total profit between the related parties

Documentation Requirements

• Local File — filed by 31 March of the following year
• Master File — where part of a multinational group
• Documentation thresholds — goods BGN 400,000; services and other BGN 200,000; loans BGN 1,000,000
• Penalties — 0.5% of the transaction value for failure to submit or incomplete documentation, but no less than BGN 5,000 and no more than BGN 100,000

Double Tax Treaties (DTTs)

Bulgaria has concluded over 70 double tax treaties, which provide significant advantages in international transactions.

Methods for Eliminating Double Taxation

• Ordinary Credit method — the tax paid abroad is credited against Bulgarian tax, but only up to the amount of Bulgarian tax on that income
• Exemption with Progression method — foreign income is exempt from taxation but is taken into account when determining the tax rate for the remaining income

Multilateral Instrument (MLI)

Bulgaria has ratified the Multilateral Convention (MLI) for the implementation of tax-treaty-related measures to prevent base erosion and profit shifting. The MLI automatically modifies existing DTTs, introducing stricter anti-abuse rules.

Prior Approval

For payments to foreign persons exceeding EUR 255,000 annually (or BGN 500,000), prior approval from the NRA is required to apply the preferential DTT rate (Art. 135-142 TSIPC). The procedure involves filing an application with accompanying residency certificates and supporting documents, with a decision issued within 60 days.

Holding Structures

Bulgaria offers an attractive regime for holding structures, particularly in the context of the Parent-Subsidiary Directive.

Tax Advantages

• Dividends from EU subsidiaries — exempt from taxation with 10%+ participation and 1+ year holding period (Art. 27(1)(1) CITA)
• 0% withholding tax on dividends to EU parent companies (Art. 194(3)(3) CITA)
• Capital gains from the sale of shares on an EU regulated market — exempt (Art. 44 CITA)
• Interest and royalties to associated companies in the EU — exempt from withholding tax where the conditions of the Directive are met (Art. 195(12) CITA)

Practical Considerations

When structuring a holding in Bulgaria, one must consider the requirements for substance (genuine economic activity, real office, personnel), the anti-abuse rules (GAAR under Art. 15-17 TSIPC), and the specific anti-avoidance rules introduced through the transposition of ATAD.

Tax Planning for Dividends

The tax treatment of dividends depends on the status of the recipient:

• 5% withholding tax on dividends to foreign legal entities from third countries (Art. 200(1) CITA), reducible under DTTs
• 0% withholding tax on dividends to EU/EEA parent companies (Art. 194(3)(3) CITA)
• 5% final tax on dividends to resident individuals (Art. 38(1) Personal Income Tax Act)
• 0% for dividends between resident legal entities (Art. 27(1) CITA)

The effective tax burden on profit distribution to an individual in Bulgaria is 14.5% (10% corporate + 5% on the net dividend) — one of the lowest in the EU.

Tax Optimisation for Real Estate

Real estate investments offer specific opportunities for tax optimisation:

• SPV structure — acquisition of properties through a special purpose vehicle (SPV) to limit risk and optimise taxation
• Rental income through a legal entity — 10% corporate tax on profit after deduction of all expenses (depreciation, repairs, loan interest, management)
• Exemption for individuals — profit from the sale of property held for more than 5 years is exempt from tax under Art. 13(1)(1)(a) of the Personal Income Tax Act
• VAT aspects — the sale of "old" buildings (over 5 years) is VAT-exempt, but an option to tax may be exercised under Art. 45(7) VATA

Pillar Two — Global Minimum Tax

Since 2024, Bulgaria has applied the Pillar Two rules of the OECD, introduced by Directive (EU) 2022/2523, for multinational groups with annual consolidated revenue exceeding EUR 750 million.

• QDMTT (Qualified Domestic Minimum Top-up Tax) — a domestic minimum top-up tax ensuring an effective rate of 15%
• IIR (Income Inclusion Rule) — applicable to parent companies
• UTPR (Under-Taxed Profits Rule) — a "catch-all" mechanism

For most Bulgarian companies (below EUR 750M in revenue), Pillar Two does not apply directly, but it indirectly affects those participating in multinational groups. For affected groups, the effective 10% rate is topped up to 15% through the QDMTT — an additional real burden of 5 percentage points.

Frequently asked questions