Legal Framework: Bulgaria, has established guidelines regarding transfer pricing to prevent tax evasion and ensure the integrity of the tax system. The foundation of transfer pricing regulations in Bulgaria lies within the Corporate Income Tax Act, Chapter 4, Art. 15.
Definition of Related Parties: Bulgaria adopts a broad definition of “related parties”. These related persons encompass various relationships, including spouses, relatives, employers and employees, partners, individuals involved in management, and those with significant ownership stakes in companies. Notably, the definition extends to foreign entities with whom transactions are conducted under certain tax conditions. The concept of control is crucial, defined by factors such as voting power, board membership, and managerial influence.
Documentation Requirements: The transfer pricing regulations outline clear obligations for multinational enterprises engaging in cross-border related-party transactions. One key requirement is the preparation of both a local file and a master file. The master file, crucial for multinational enterprises, must be issued within 12 months after the local file deadline.
Entities subject to corporate income tax engaging in cross-border transactions are mandated to prepare a Local transfer pricing file, with exemptions available when they meet 2/3 specific thresholds: assets not exceeding approximately BGN 38 million (€19 million), annual net revenue below approximately BGN 76 million (€39 million), and a workforce of fewer than 250 individuals.
A taxpayer obligated to prepare a Local file, and identified as a Constituent Entity within a MNE group, is required to prepare a Master file as per Chapter 8 “a” of the TSSPC. Based on the TP Guidelines of the NRA the micro enterprises are not required to conduct TP documentation. Finally, a simplified report documenting arm’s length pricing policy should be prepared by the taxpayers under scope for transactions concerning goods or services under BGN 200K (€102K).
Thin Capitalization Rules and Intragroup Financing Activities:
Thin capitalization rules are in place aiming to prevent excessive interest deductions. Furthermore due to absence of specific guidance on financial intragroup transactions, OECD guidelines must be followed.
Country-by-Country Reporting (CbCR):The obligation to submit a CbC report pertains to a Reporting Entity, identified as a Constituent Entity within an MNE Group, where the group’s consolidated revenue amounted to 750 million Euro or higher (or its equivalent in the domestic currency). Resident entities and PEs belonging to a MNE group, which is required to submit a Country-by-Country report, must provide notification regarding the Group’s intention to file it.
Public CbC Reporting: Bulgaria recently enacted amendments to the Accountancy Act (Off. Gaz. 19 Dec 2023), aligning with EU Directives by introducing public CbC reporting. The law mandates public reporting for entities with annual consolidated revenue exceeding BGN 1.5 billion over the last two consecutive financial years, adjusted from the standard EUR 750 million. Public CbC reports, in Bulgarian language, must be announced in the Commercial Register and the Register of Non-Profit Legal Entities within 12 months after fiscal year’s end. Reporting entities include also branches or subsidiaries in Bulgaria if the ultimate parent or an individual enterprise is established in a third (non-EU) country, unless the ultimate parent or the individual enterprise has published a public CbC report on its website in an official EU language. Additionally, these reports must be available on the reporting entity’s website for five consecutive years, except when published in a central EU register.
Compliance Procedures: Failure to adhere to transfer pricing documentation requirements can lead to substantial penalties for taxpayers in Bulgaria. Non-submission of Country-by-Country reports incurs fines ranging from €51k to €102k, while omissions, incomplete, or falsified data result in penalties between €26k to €77k. Similar penalties apply for failure to submit notifications.
Taxpayers obligated to prepare a Local file face fines up to 0.5% of the total value of transactions requiring TP documentation; for loans, the transaction value equals the loan amount. The Local file is deemed unprepared if not submitted to tax authorities upon request within a minimum 7-day period.
Failure to prepare a Master file incurs a fine of approximately €2600 to €5100.
Additionally, taxpayers providing incorrect or incomplete information in their transfer pricing documentation face fines ranging from approximately €770 to €2600.
Ensuring timely provision of a solid transfer pricing documentation is essential to prevent potential penalties and serves as the strongest defense against challenges from tax authorities during audits.
For more information, please contact our Transfer Pricing experts at tp@privelpartners.gr.
