Bulgaria: Bulgarian transfer pricing regulations

Anastasia Sagianni

Bulgarian TP rules were first introduced in the Corporate Income Tax Act (CITA), Tax and Social Security Procedures Code (TSSPC), and the Ordinance No H-9 for implementation of the TP methods, issued by the Minister of Finance on August 29 2006. Following international trends, a manual providing guidance on TP issues was published in 2010 by the national revenue authority (NRA).

According the NRA's TP guidance, only small businesses are exempt from preparing TP documentation. Therefore, the rules apply to the majority of businesses engaged in cross-border transactions.

For TP purposes, taxpayers should follow the implementation of one or a combination of the following methods:

• The comparable uncontrolled price (CUP) method;

• The resale price method (RPM);

• The cost plus method (CPM);

• The transactional net margin method (TNMM); or

• The profit split method (PSM).

Although the guidance does not impose binding rules, taxpayers should follow the requirements and prepare TP documentation in the tax year by the same date that the annual tax return is due for submission. With the proper documentation in place, companies mitigate the risk of tax authorities assessing the transfer prices for investigation.

In Bulgaria there is no a specific tax audit procedure relating to TP issues, but related party transactions can be examined as part of general tax audit procedures.

The definition of related parties in the Bulgarian jurisdiction is very broad and includes situations where one party directly or indirectly participates in the management, control, or capital of another party. It is important to note that in Bulgaria even a 5% shareholding relationship is sufficient to define two entities as related parties, according to the TSSPC. Under the definition, if related parties perform transactions, then those transactions should be done in accordance with the arm's length principle.

During a potential tax audit, the absence of relevant documentation increases the risk of a tax adjustment. Furthermore, failure to submit the required TP documentation can result in an effective penalty between €125 ($138) and €250.

It is important to note that in transactions related to goods, the tax authorities generally seek price adjustments, while for service transactions they tend to focus on the real substance of the provided services.

Differences between the transfer prices and the market prices can be considered as hidden profit and a penalty of 20% of the respective difference may be applied.

In addition, every legal entity that incorrectly determines its tax obligation is subject to a penalty ranging from €250 up to €1,500.

According to Bulgarian legislation, there is no deadline for submitting TP documentation to the NRA. Instead, documentation is provided by the company during a tax audit and upon request from tax auditors. Taxpayers have a maximum of 30 days to submit any requested documents, but standard practice dictates that information should be submitted with 14 days after the request is made.

In January 2014, the NRA published a table (Appendix 4 on the annual corporate income tax return form) that must be completed by every legal entity by March 31 of each tax year. Taxpayers must include their related party transactions in the table and any disclosures made in relation to transactions with entities based in a jurisdiction with a preferential tax system.

The general statutory limitation period for tax liabilities in Bulgaria is five years, effective from January 1 of the following year when the tax liabilities are due.

According to Bulgarian legislation, the interest rate that is defined in the loan agreements between related parties should follow the arm's length principle and should not diverge from the market interest rate. The Bulgarian National Bank regularly publishes average rates of interest for different types of loans and credits. The following factors should be considered when establishing the arm's length rate:

• Amount and duration of the loan;

• The debtor's credit rating;

• The currency of the loan;

• The securities and guarantees provided;

• The country in which the debtor is located; and

• The industry in which the debtor operates.

In order for interest charges to be tax deductible, a thin capitalisation rule should be applied. According to the Bulgarian CITA (Article 43), the positive difference between expenses on interest and income from interest is not tax deductible when it exceeds 75% of the accounting financial result before all expenses on interest and income from interest. One of the key points is that in order to check the entity's compliance to the thin capitalisation rule, the taxpayer should summarise interest arising from transactions with every party (related and unrelated). The only exceptions are:

• Unrelated parties where one of them is a bank or a leasing company;

• Credit institutions that do not fall under this regulation at all; and

• Situations in which the owners' capital exceeds at least three times the debt capital.

The significant "trap" when testing an entity's thin capitalisation compliance is when there is a cross-collateral loan. In this case, the interest occurring is added to the total amount of interest arising from the other transactions.

Anastasia Sagianni (anastasia.sagianni@eurofast.eu)

Eurofast

Tel: +359 2 988 69 75

Website: www.eurofast.eu