Tax Planning for M&A Deals in Bulgaria — Structuring and Risks (2026)

Legal Framework for M&A Transactions in Bulgaria

Mergers and acquisitions in Bulgaria are governed by several interconnected legislative acts, each with tax implications:

• Commercial Act (CA) — regulates the form and procedure for transfer of company shares (Art. 129 CA for LLCs), transfer of enterprise (Art. 15 CA) and transformation of commercial entities (Chapter Sixteen).
• Corporate Income Tax Act (CITA) — determines the tax treatment of profits from asset and share transactions, thin capitalization rules (Art. 43 CITA), transfer pricing (Art. 15–16 CITA) and the tax regime for dividends and liquidation proceeds.
• Personal Income Tax Act (PITA) — regulates capital gains taxation for individuals (Art. 33 PITA), including exemptions for securities traded on an EU regulated market.
• Value Added Tax Act (VATA) — determines the VAT treatment of asset transfers and transfer of an enterprise as a going concern (Art. 10 VATA).
• Local Taxes and Fees Act (LTFA) — governs the property acquisition tax (2–3 % in Sofia) applicable to real estate transfers.

For cross-border transactions, double tax treaties (DTTs), EU directives (Parent-Subsidiary Directive, Interest & Royalties Directive) and ATAD rules transposed into CITA also apply.

Share Deal — Tax Treatment of Share Transfers

In a share deal, the buyer acquires the shares or interests in the target company. The company itself continues to exist as a legal entity with all assets, contracts, rights and liabilities.

Tax Consequences for the Seller

• Individual seller: the taxable base is the positive difference between the sale price and the documented acquisition cost (Art. 33 PITA). The tax rate is 10 %.
• Corporate seller: the profit from the sale of shares is included in the CITA tax base and taxed at 10 % corporate income tax.
• Exemption: income from disposal of financial instruments traded on an EU regulated market is tax-exempt for individuals if held for more than 24 months (Art. 13(1)(3) PITA).

VAT and Property Taxes

• VAT: the transfer of shares and interests falls outside the scope of VATA — it does not constitute a supply of goods or services.
• Property acquisition tax: not applicable, as ownership of the company is transferred rather than individual assets.

Form and Procedure

For LLCs, the transfer of shares requires notarial certification of signatures and content (Art. 129 CA) and registration in the Commercial Register. For joint-stock companies, transfer is effected by endorsement and entry in the shareholders’ register.

Key Risk

In a share deal, the buyer inherits all liabilities of the target company — including unknown and hidden ones. This makes tax due diligence critically important.

Asset Deal — Tax Treatment of Asset Transfers

In an asset deal, the buyer acquires individual assets (or the enterprise as a going concern under Art. 15 CA). The target company continues to exist unless the entire business is transferred.

Corporate Income Tax

The profit from the sale of assets is included in the seller’s tax base and taxed at 10 % corporate income tax under CITA. The tax base is the difference between the sale price and the book (tax) value of the assets.

VAT Treatment

• Sale of individual assets: standard taxable supply at 20 % VAT.
• Transfer of enterprise as a going concern (Art. 10 VATA): not a supply within the meaning of VATA — outside the scope of VAT. The acquirer steps into the tax rights and obligations of the transferor.

Property Acquisition Tax

When real estate is transferred, a local property acquisition tax of 2–3 % applies, calculated on the higher of the sale price and the tax valuation (2.5 % in Sofia). A notarial deed is required for the transfer.

Advantage: Selective Liability

The buyer can choose which liabilities to assume. However, in an enterprise transfer under Art. 15 CA, the acquirer and the transferor are jointly and severally liable for obligations up to the date of registration in the Commercial Register.

Comparison: Share Deal vs. Asset Deal

The following table summarises the key tax and legal differences between the two structuring models:

Tax Due Diligence — 8 Key Areas

Tax due diligence is an essential component of every M&A transaction. Its purpose is to identify hidden tax risks that may affect the deal price or structure. The key areas of review include:

1. Open tax liabilities — unfiled returns, unpaid taxes, accrued interest and penalties. Review of the tax history for the past 5 years (statute of limitations under the Tax and Social Insurance Procedure Code).
2. Transfer pricing exposure — transactions between related parties and whether they were carried out at arm’s length. From 01.01.2026, Ordinance H-3 introduces new documentation requirements.
3. Hidden profit distribution — review of expenses that effectively constitute profit distribution in favour of partners or related parties (Art. 267 CITA).
4. Thin capitalisation violations — whether the company has complied with the interest deduction limitations under Art. 43 CITA (equity-to-debt ratio).
5. VAT recovery risks — properly claimed input VAT credit, supply chain review, risk of adjustments under Art. 79 VATA where the purpose of assets changes.
6. Social security compliance — correctness of calculated and paid social and health insurance contributions, including for managers under management and control agreements.
7. Pending or potential NRA audits — existence of ongoing audit proceedings, issued tax assessment acts or indicators of an upcoming review.
8. International tax positions — risk of permanent establishment (PE) abroad, correct withholding tax (WHT) application, DTT compliance.

Cross-Border M&A — Additional Tax Factors

When foreign investors are involved or the deal is structured on a cross-border basis, additional tax considerations arise:

Double Tax Treaties (DTTs)

Bulgaria has over 68 active DTTs which regulate the allocation of taxing rights between states and reduce withholding tax rates on dividends, interest and royalties. Proper DTT application is critical for optimising the tax burden in cross-border M&A.

Parent-Subsidiary Directive

Dividends distributed by a Bulgarian subsidiary to an EU parent company are exempt from withholding tax, subject to a minimum holding of 10 % and a holding period of at least 2 years.

Interest & Royalties Directive

Interest and royalties between associated EU companies are exempt from withholding tax where the conditions of association and minimum holding are met.

ATAD (Anti-Tax Avoidance Directive)

Transposed into CITA, ATAD introduces:

• General Anti-Avoidance Rule (GAAR) — the NRA may deny tax advantages for arrangements lacking economic substance.
• CFC rules — taxation of undistributed profits of controlled foreign companies.
• Exit taxation — on transfer of assets or tax residence.
• Hybrid mismatches — rules against double non-taxation through hybrid instruments.

Foreign Direct Investment (FDI) Screening

Where the investor is from a non-EU country, mandatory notification may be required under the Investment Promotion Act and Regulation (EU) 2019/452 on screening of foreign direct investments.

Transfer Pricing in the M&A Context

Transfer pricing acquires particular importance after the completion of an M&A deal, when the acquired company enters a group of related parties:

• Post-deal restructuring: reallocation of functions, assets and risks between group companies must comply with the arm’s length principle.
• Management fees: fees between the parent company and the acquired entity are subject to arm’s length review. The NRA actively scrutinises these expenses.
• IP transfers: relocation of intellectual property to another jurisdiction after the acquisition is a high-risk tax area.
• Ordinance H-3 (from 01.01.2026): the new transfer pricing documentation rules require preparation of a local file for related-party transactions exceeding EUR 511,292 (BGN 1,000,000).

Planning intra-group transactions in advance is essential for reducing the risk of adjustments by the NRA.

Tax Treatment of Goodwill

In M&A transactions, positive goodwill frequently arises — the difference between the price paid and the fair value of the net identifiable assets of the acquired enterprise.

Accounting Treatment

• Under Bulgarian National Accounting Standards (NAS): goodwill is amortised over its useful life. Where this cannot be reliably determined, the period is up to 5 years.
• Under IFRS: goodwill is not amortised but is subject to annual impairment testing.

Tax Treatment under CITA

For tax purposes, goodwill is a tax intangible asset and is amortised over a period of no more than 3 years. Tax amortisation is permitted regardless of the applicable accounting standard, which creates a temporary tax difference under IFRS.

Earn-Out Clauses — Tax Aspects

Earn-out clauses are a mechanism for payment of additional consideration tied to the future performance of the acquired company. Their tax treatment depends on the characterisation of the payment:

• Purchase price adjustment: if the earn-out is a pure adjustment of the share purchase price, the payment is treated as a capital gain — taxed at 10 % (individuals) or included in the CITA tax base (legal entities).
• Service fee: if the earn-out is tied to the seller’s continued employment in the company, the NRA may reclassify it as employment income — subject to higher taxation at 10 % plus social and health insurance contributions.
• Practical recommendation: structure earn-out clauses clearly as purchase price adjustments, without linking them to an employment relationship, to avoid more unfavourable tax treatment.

The timing of the taxable event for earn-outs depends on the specific conditions — for contingent payments, the tax obligation may arise upon actual payment rather than at signing.

Practical Recommendations for M&A Structuring

Based on our experience in structuring M&A transactions in Bulgaria, we recommend the following approach:

1. Determine the tax-efficient structure early — the choice between share deal and asset deal should be made before negotiations begin, as it defines the entire transaction framework.
2. Conduct thorough tax due diligence — cover all eight areas outlined above. Request a tax clearance certificate from the NRA for the target company.
3. Include tax warranties and indemnities — the SPA should contain detailed tax representations & warranties and indemnity clauses for undisclosed tax liabilities.
4. Plan post-transaction restructuring — intra-group flows (management fees, interest, royalties) must be established at arm’s length from day one.
5. Comply with Ordinance H-3 — ensure TP documentation is prepared for all intra-group transactions exceeding EUR 511,292.
6. For cross-border deals, verify DTT application — optimise withholding tax on dividends, interest and royalties through proper structuring and DTT application.
7. Check FDI screening requirements — where the investor is from a non-EU country, file the notification under the Investment Promotion Act in a timely manner.

Frequently Asked Questions