BULGARIA Law and Practice Contributed by: Nikolay Zisov, Svetlina Kortenska, Deyan Terziev and Teodora Peycheva, BOYANOV & Co
5. Spin-Offs 5.1 Trends: Spin-Offs
4.3 Liquidity Event: Form of Consideration
In Bulgaria, most transactions involving the sale of a privately held technology company are typi- cally done as a sale of the entire company for cash. This provides a clean exit for the seller and complete liquidity for the shareholders, including VC investors. While stock-for-stock transactions or a combi- nation of stock and cash are less common in Bulgaria compared to cash-only deals, they can be seen in practice as the preferred choice under certain circumstances. 4.4 Liquidity Event: Certain Transaction Terms Founders and VC investors in Bulgaria are gen- erally expected to stand behind representa- tions and warranties and certain liabilities after closing. Indemnification and escrow/holdback mechanisms are commonly used to address these risks. While representations and warran- ties insurance is not as prevalent in Bulgaria as in some other jurisdictions, it can be con- sidered in certain cases. Another valuable tool in technology M&A transactions is the earn-out mechanism. It allows the seller of a business to receive additional payments in the future, typi- cally based on the start-up’s performance or the achievement of certain milestones. This can be an appropriate arrangement particularly when there is uncertainty about the future value of the target company. The earn-out can help bridge valuation gaps, align incentives, and reduce upfront payments.
In Bulgaria, the most common transaction type is a share transfer. When spin-offs are considered, they are typically driven by the need to separate distinct business units or to attract specialised investment, though such cases remain limited. 5.2 Tax Consequences From a tax perspective, a spin-off is generally considered a tax-neutral event for both VAT and corporate income tax purposes. From a corporate income tax perspective, the transformed companies and foreign business establishments will be subject to corporate income tax for the final tax period, as per the general tax laws. This taxation is considered conclusive. At the shareholder level, accounting gains or losses arising from the acquisition of shares in the receiving or acquiring companies are not recognised for tax purposes in the year of acqui- sition. These gains or losses could lead to tem- porary tax differences in future periods. Income earned from the acquisition of shares by foreign legal entities may be subject to withhold- ing tax or be exempt, depending on the general tax laws and applicable Double Tax Treaties. Withholding tax on capital gains, if applicable, is due within 60 days of the share transfer. 5.3 Spin-Off Followed by a Business Combination There are no restrictions on conducting a busi- ness combination after a spin-off procedure is completed. However, the Bulgarian Commerce Act stipulates that during a spin-off process, nei-
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