BULGARIA Law and Practice Contributed by: Marin Sarafov, Petya Norova, Iva Georgieva and Eduard Milchev, G&P Law
• for income tax purposes, accounting expenses for donations; and • in order to avoid double taxation, income derived from dividend distribution from other entities regis - tered under Bulgarian law or in another member of the EU or the EEA, is not recognised as company income. The aforementioned tax incentives are the most com - mon examples, but do not represent the complete list. 5.4 Tax Consolidation This is not applicable in Bulgaria. 5.5 Thin Capitalisation Rules and Other Limitations The Bulgarian Corporate Income Tax Act regulates thin capitalisation as a means to restrict recognition of interest expenses when a company is financed through a disproportionately high amount of debt compared to its equity. These rules aim to limit the risk of distributing the profits of the company through interest, resulting in the deduction of the tax base for corporate income tax. These rules do not apply for bank credit and financial leasing, unless the parties to the financing are related parties or the financing was guaranteed with the par - ticipation of related parties. Thin capitalisation rules apply in cases where the capital raised exceeds the equity of the respective Transfer pricing rules are applicable in the territory of the Republic of Bulgaria to serve as a guarantee for market prices in transactions between related, includ - ing affiliated, parties. In cases of audits by the NRA, it is the companies that bear the burden of proof that the terms, and especially the price of a transaction, meet the requirements to be defined as market price. Several methods to define market price can be used – for example, the comparable uncontrolled prices method, market prices method, value-added meth - company three times. 5.6 Transfer Pricing
od, net transaction profit method, or allocated profit method. In cases of groups of companies, transfer pricing poli -
cies must be introduced. 5.7 Anti-Evasion Rules
The rules for anti-evasion of taxes under Bulgarian law include several institutes, besides the transfer pric - ing rules described above. The anti-evasion meas - ures under the Corporate Income Tax Act include, for example: • the general prohibition of anti-evasion transactions or sets of transactions – when one or more supply transactions, including those between unrelated parties, are entered into under terms that could result in tax avoidance; • the identification of specific cases as tax avoidance transactions, eg, when there is a significant excess of quantities of materials, raw materials, and other production costs compared to what is customary for a business, and there are no objective reasons for this, etc; and • the definition of sham transactions as tax avoid - ance schemes per se. These rules could also apply to individuals and per - sonal income tax (eg, when transactions are between related parties). The burden of proof in cases of audits by the NRA is borne by the taxable entity or person. 5.8 Tariffs Bulgaria is a member state of the EU and applies the EU tariff rules, including the Union Customs Code (UCC) and the Common Customs Tariff (CCT). The tariff rates and policies are defined by the EU’s Common Commercial Policy and CCT, WTO agree - ments and bilateral agreements with other states, the EU’s free trade agreements and preferential trade arrangements, the EU’s general preferential scheme, EU anti-dumping and anti-subsidy investigations, geopolitical and economic measures, etc. The most unfavourable or more stringent tariff treat - ment applies to:
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