When a company sells goods, provides services, obtains financing or allocates costs within its corporate group, the prices applied to those transactions are not merely an internal matter. They determine how much of the group’s overall profit remains in Bulgaria and, consequently, how much corporate income tax is payable locally.

For this reason, when examining transactions between related parties, the Bulgarian National Revenue Agency does not consider only the agreed price. The authorities examine the overall economic logic of the relationship: what was actually performed, who makes the decisions, who uses the assets, who bears the economically significant risks and whether the financial result reported in Bulgaria corresponds to the actual role of the Bulgarian company.

Since the beginning of 2026, this analysis has been conducted under a new and considerably more detailed regulatory framework. Ordinance No. N-3 of 7 November 2025 places an even stronger emphasis on the economic substance of the transaction, the parties’ actual conduct and the selection of the most appropriate method for determining an arm’s length price.

The practical message for businesses is clear: having an agreement, an invoice and transfer pricing documentation is necessary, but not always sufficient. These documents must correspond to the manner in which the relationship is actually conducted and to the financial result reported by the company.

The Review Begins with the Actual Transaction

The first question in any transfer pricing review is what transaction was actually carried out between the related parties. The agreement is the starting point, but it cannot replace an analysis of the parties’ actual conduct.

A group may, for example, characterise its Bulgarian company as a manufacturer performing limited functions and assuming limited risks. This would ordinarily suggest that the principal decisions and significant commercial risks are assumed elsewhere within the group. If, however, the Bulgarian company organises production in practice, manages suppliers, determines key commercial terms and incurs sustained losses, it is necessary to examine whether the contractual model accurately reflects the actual allocation of functions and risks.

A similar issue arises in relation to distributors. A company may be presented as a routine distributor while, in practice, it determines prices and discounts, maintains substantial inventories, develops the local market and bears the risk of unsold products or unpaid receivables. In such circumstances, the transfer pricing policy should reflect the company’s actual contribution rather than merely the label used in the agreement.

A tax review may therefore cover not only agreements and invoices, but also internal correspondence, procedures for approving prices and discounts, job descriptions, the organisational structure, records relating to the movement of goods and funds, analytical accounting data and documents showing where decisions are actually made.

The key practical test is whether the agreement, invoicing, accounting treatment and actual performance all describe the same transaction.

The Transfer Pricing File Is Not Merely a Formal Requirement

The local file should explain why the terms of the controlled transactions correspond to those that independent enterprises would have agreed. Its value, however, depends not on its length, but on whether the analysis relates to the actual arrangements and can be supported by evidence.

A detailed file will not resolve a problem if it describes a business model that does not correspond to the parties’ actual conduct. The same applies where the margin stated in the documentation cannot be reconciled with the accounting results, or where an explanation for a deviation appears only after the commencement of a tax audit and is not supported by information from the relevant period.

Particular attention should be paid to consistency between the local file, the group master file, the intercompany agreements, the annual financial statements, the analytical accounting records and the corporate income tax return. A discrepancy between these sources does not automatically prove that the pricing was not at arm’s length, but it raises a question that the company will be expected to answer.

At the same time, the revenue authorities cannot make an adjustment solely by comparing the company’s overall financial indicators with those of other enterprises. Any adjustment must be linked to a specific controlled transaction or to a properly justified aggregation of transactions. The authorities must identify the method applied, the comparable transactions used and the manner in which the deviation from arm’s length conditions was calculated.

Transfer pricing control is not a contest over which party has submitted the larger volume of documents. What matters is which position provides the more persuasive explanation of the actual transaction and its economic outcome.

How the Method and Market Comparables Are Examined

Once the parties’ actual arrangement and performance have been established, an appropriate means of testing the price or profit must be selected.

Depending on the nature of the transaction, the analysis may involve a direct comparison of prices, a cost-plus analysis, a resale margin, a net profit indicator or the allocation of the combined profit between the participants. The selection should not be mechanical. It depends on the available information, the parties’ functions and the possibility of identifying reliable comparable transactions.

In practice, benchmarking analyses based on specialised databases are frequently used. The mere existence of such an analysis, however, does not guarantee a reliable result. It should be clear why the particular companies were selected, which companies were excluded, what period was examined and whether the selected profit level indicator reflects the economic logic of the transaction.

Two companies may formally carry out similar activities while performing substantially different functions, operating in different markets, using different assets or assuming different risk profiles. A manufacturer that owns valuable intangible assets and develops the market independently cannot readily be compared with an enterprise carrying out standard contract manufacturing without bearing significant commercial risks.

Similarly, the geographical market, sales volumes, contractual terms and product characteristics are relevant only if it can be explained how they affect the price or profit. Merely listing these criteria is not sufficient.

Where a company has similar transactions with independent counterparties, those transactions may provide a particularly valuable source of comparison. Even then, however, the quantities, terms, payment conditions, market, currency, guarantees and other characteristics must be examined. An internal comparable is persuasive not simply because it originates from the same company, but because it is economically comparable.

How Losses and Low Margins Are Assessed

A loss does not automatically mean that the transfer prices are incorrect. Independent enterprises may also incur losses when launching a new activity, losing a key customer, undergoing restructuring, facing unfavourable market conditions or experiencing temporary production difficulties.

During a tax review, however, the authorities will usually ask whether the loss is consistent with the company’s functional profile and with the risks it actually assumes.

If the Bulgarian company is characterised within the group model as a service provider, manufacturer or distributor with limited functions and risks, but incurs sustained losses, the deviation will need to be explained. It is necessary to establish what caused the loss, how long the relevant circumstances continued and whether an independent contractor in a comparable position would have borne the same result or negotiated compensation from the other party.

Particular care is required when excluding certain expenses from the analysis. Training costs, costs associated with launching a new project, restructuring expenses or inefficiencies may be specific to a particular period, but that position must be demonstrated. If similar expenses arise regularly as part of the ordinary business, it becomes more difficult to present them as one-off and exceptional.

The practical risk is that the financial result may be recalculated solely to bring it within the selected arm’s length range. Any adjustment should have a clear economic rationale and should be supported by information available for the relevant period.

Intra-Group Services: Several Separate Questions, Not One

In relation to management, administrative, IT, marketing and consulting services, the general question is often whether the expense will be recognised for tax purposes. In practice, that question needs to be divided into several distinct issues.

First, it must be possible to establish what service was actually provided. Second, the service must be connected with the recipient’s business activity. Third, the expense must be properly documented. Fourth, the service must provide an economic or commercial benefit to the company. Only after these matters have been addressed should the arm’s length nature of the remuneration be examined.

These questions are related, but they are not interchangeable. A service may have been genuinely provided while its price is not at arm’s length. The remuneration may appear reasonable when expressed as a percentage or a mark-up, but there may be insufficient evidence of what was actually performed. In other cases, the activity may serve the interests of the group in its capacity as shareholder without providing a separate benefit to the local company.

An agreement and an invoice will not ordinarily be sufficient if they contain only broad descriptions such as “management support” or “business development”. Evidence may include correspondence, specific assignments, reports, analyses, presentations, working files, meeting records, system access and other records demonstrating the work actually performed. There is no universal set of required documents. The appropriate evidence depends on the nature of the service and on how similar services would ordinarily be commissioned, performed and accepted.

The manner in which common costs are allocated among group companies should also be examined. The allocation key should have a logical relationship with the benefit received. Allocation by reference to revenue may be appropriate for one service but not for another. Depending on the activity, the number of employees, the systems used, the number of transactions processed or another objective indicator may provide a more appropriate basis.

Intra-Group Financing Is Not Merely a Question of the Interest Rate

For a loan, cash-pooling arrangement, guarantee or deferred payment, it is not sufficient to compare the agreed interest rate with a general banking index. The first step is to identify the financial transaction that was actually entered into and to consider whether an independent lender would have provided the financing on the same terms.

Relevant factors include the amount, term, currency, repayment profile, security, subordination of the claim, the borrower’s creditworthiness and its capacity to service the debt. It is also necessary to consider whether the financing is genuinely debt or whether, based on its economic characteristics, it more closely resembles an equity contribution.

Where bank loans are used as comparables, their terms should be examined to determine whether they are genuinely comparable. A short-term secured facility does not necessarily provide a reliable basis for comparison with long-term unsecured financing from a related party. The differences may require adjustments or the use of another source of market data.

The price of the financing is only one part of the analysis. The interest rate may be at arm’s length while the tax deductibility of the expense is restricted under separate rules. Conversely, recognition of the interest expense for accounting purposes does not establish that its amount is consistent with arm’s length conditions.

When a Local File Is Required

Not every company entering into related-party transactions is required to prepare a local file. The obligation depends on the size of the enterprise, the nature and value of the controlled transactions and the applicable statutory exemptions.

From 2026, the exemption assessment uses thresholds of EUR 20 million in assets, EUR 40 million in net sales revenue and an average workforce of 250 employees. The exemption applies where, at the end of the preceding year, at least two of these three thresholds have not been exceeded.

Separate thresholds apply to the individual transactions. A local file is prepared only for a transaction, or an aggregation of transactions, exceeding the relevant statutory threshold. Where several operations are similar or economically connected, their values may need to be considered together rather than invoice by invoice.

The local file must be prepared by 30 June of the following year. Where the company forms part of a multinational group and falls within the mandatory documentation regime, it must also have access to the group master file within the statutory deadline.

It is important, however, to distinguish between the obligation to prepare a local file and the obligation to apply arm’s length conditions. A smaller enterprise, a company with transactions below the relevant thresholds or a business carrying out controlled transactions exclusively in Bulgaria may not be required to maintain a full local file. This does not mean that, during a tax review, the company cannot be asked to explain how its prices were determined and why the relevant conditions are at arm’s length.

The decision whether to prepare an analysis should therefore not be based solely on the formal thresholds. Relevant considerations include the value and complexity of the transactions, their potential effect on the taxable result, sustained losses, unusual margins and significant payments to foreign related parties.

What Should Be Prepared in Advance

The most reliable defence is created when the transaction is structured and performed, rather than after the commencement of a tax audit.

Agreements should reflect the parties’ actual functions and responsibilities. Invoiced services should be traceable to specific work and identifiable results. The financial data used in the analysis should reconcile with the accounting records. The selected method should correspond to the characteristics of the transaction, while market comparables should be selected using transparent and consistent criteria.

Before the end of the financial year, it is useful to examine whether the actual result corresponds to the transfer pricing policy. Where a material deviation exists, its causes should be identified and documented in due time. An explanation prepared several years later during a tax audit will rarely be able to recreate information that was not retained when the transaction was performed.

The local file, master file, group policy, agreements, invoices, annual financial statements, analytical accounting records and corporate income tax return should also be compared. They do not need to contain identical information, but they should be mutually consistent and describe the same business model.

What Ultimately Remains After the Review

Transfer pricing in 2026 is not merely a documentation requirement. It is an examination of whether profits are reported where the functions are actually performed, the assets are used and the economically significant risks are managed.

For the company, this means that the strongest position is not necessarily the longest local file or the most sophisticated benchmarking analysis. The strongest position is one in which the agreements, actual conduct, accounting data and economic analysis are consistent and can be supported by evidence.

The revenue authorities are likewise required to link every adjustment to a specific transaction, an appropriate method and reliable market comparables. A general assertion that the margin is too low or that a related party received excessive remuneration cannot replace the required analysis.

Vassilev & Partners Law Firm advises Bulgarian and international groups on the structuring and review of intra-group transactions, the preparation of transfer pricing documentation and representation during tax inspections, audits and subsequent tax disputes. Work in this area requires a combined understanding of tax law, contractual relationships, accounting data and the practical organisation of the business.

Disclaimer

The information contained in this article is provided for general informational purposes and presents the principal aspects of the subject matter under the legal framework applicable as at the date of publication. Transfer pricing rules and their application depend on the specific facts, the structure of the group and the nature of the relevant transactions. An individual legal and economic analysis is required to assess a particular model or tax risk. This article does not constitute legal or tax advice.

Back to all
Older Vassilev & Partners Law Firm Featured in VAGABOND
Latest News