Franchise Agreements in Bulgaria — Legal Framework, Royalty, Tax and VAT (2026)

Legal framework for franchising in Bulgaria

Franchising is not regulated as a separate contract in the Commerce Act (CA) or the Obligations and Contracts Act (OCA). It falls into the unnamed contracts category — the parties determine content freely, provided it does not conflict with mandatory law and good morals (Art. 9 OCA).

Applicable regulations

• OCA — general contract law, performance, penalties (Art. 20a et seq.).
• Trademarks and Geographical Indications Act (TGIA) — registration and protection of the licensed trademark.
• Patents and Utility Model Registration Act — if the franchise includes patent rights.
• Protection of Competition Act (PCA) — rules on vertical restraints.
• Regulation (EU) 2022/720 (VBER — Vertical Block Exemption Regulation) — block exemption for vertical agreements, valid until 31 May 2034.
• European Code of Ethics for Franchising (European Franchise Federation) — non-binding best practice standard.

Types of franchise

Sub-franchising

A master franchisee acquires the right to conclude franchise agreements with third parties in a defined territory, creating a three-tier structure: franchisor → master → end franchisee. Tax treatment of payments varies and requires analysis at each level.

Mandatory clauses in a franchise agreement

1. Parties

Full identification of franchisor (with UIC, seat, representative) and franchisee. For foreign franchisors — apostilled corporate documents and registration certificate from the home jurisdiction.

2. Subject of the agreement

• Exact identification of the trademark (registration number at the Bulgarian Patent Office or EUIPO);
• Know-how — defined as trade secret with description;
• Business concept — standardised procedures, operations manual;
• Software and IT systems (if any);
• Marketing, design and training materials.

3. Territory and exclusivity

Defining the geographic zone. Possible regimes:

• Exclusive territory — the franchisor does not admit other franchisees or own outlets in the zone.
• Non-exclusive territory — the franchisor reserves the right to appoint others.
• Active sales ban zone — restriction on active solicitation outside the territory.

4. Term and renewal

Typically 5–10 years with renewal option. Under VBER, post-term non-compete clauses are limited to 1 year in certain cases.

5. Fees — initial and royalty

The financial structure typically includes:

• Initial franchise fee — lump sum at signing, typically EUR 10,000–100,000 for established brands.
• Continuing royalty — periodic payment; typically 3–8% of net turnover, may be a fixed amount.
• Advertising fee — for joint marketing campaigns, typically 1–4% of turnover.
• Training and support fees — one-off or recurring.
• Minimum annual fee — guarantees a minimum for the franchisor.

6. Franchisor obligations

• Provision of know-how, training, materials;
• Trademark maintenance and protection from infringement;
• Ongoing renewal of the business concept;
• Marketing support (against the advertising fee).

7. Franchisee obligations

• Compliance with standards and operations manual;
• Timely payment of all fees;
• Confidentiality of know-how;
• Exclusive purchases from approved suppliers (if stipulated);
• Reporting and turnover disclosure.

8. Non-compete

• During the agreement — franchisee does not develop competing business;
• Post-termination — typically 12 months, limited to the territory of operation, compatible with VBER.

9. Termination

Grounds:

• Mutual consent;
• Term expiry;
• Material breach (with cure notice);
• Insolvency or liquidation of a party;
• Change of control — termination option.

10. Consequences on termination

• Return of operational materials and confidential information;
• Deidentification — removal of brand signs from premises;
• 12-month non-compete;
• Settlement of unpaid fees.

Withholding tax on royalties (Art. 195 CITA)

When a Bulgarian franchisee pays royalties to a foreign legal entity without a permanent establishment in Bulgaria, the payment is subject to withholding tax.

Rate and basis

• Art. 12(5) CITA — defines Bulgarian-source income including royalties for trademark, know-how and copyright use.
• Art. 195 CITA — rate 10% on gross royalty.
• The payer (Bulgarian entity) must withhold the tax and pay it by the end of the month following the quarter of accrual.
• Reporting: Art. 201 CITA return (form 4001).

Exemption under Directive 2003/49/EC

Royalties between related EU/EEA parties are exempt from withholding if:

• Minimum 25% participation (direct or indirect);
• Participation held for minimum 2 years;
• The recipient is the beneficial owner;
• Both parties are corporate taxpayers in the EU/EEA.

DTT application

If the franchisor’s country has a DTT with Bulgaria, a reduced royalty rate may apply:

Application requires a tax residence certificate (see our article on the certificate) and, for payments over EUR 255,000 annually to one recipient, prior clearance under Chapter XVII DOPK.

VAT treatment of franchise payments

B2B franchise (business-to-business)

Franchise services are a taxable supply under the VAT Act. The place of supply is determined under Art. 21(2) VATA — the recipient’s location (B2B general rule).

• Bulgarian franchisor → Bulgarian franchisee: supply in Bulgaria, 20% VAT on the invoice.
• EU foreign franchisor → Bulgarian franchisee: supply in Bulgaria, recipient self-assesses VAT (reverse charge). If the franchisee is not VAT-registered, registration under Art. 97a VATA is mandatory before the first payment.
• Bulgarian franchisor → EU foreign franchisee: supply outside Bulgarian VAT scope; recipient self-assesses in its state.
• Non-EU franchisor → Bulgarian franchisee: import of services, reverse charge under Art. 82 VATA.

Royalty and initial fee — same regime

Both are service consideration, taxable under VAT. No distinction between periodic royalty and one-off initial fee for VAT purposes.

Competition law — VBER and vertical restraints

Franchise agreements contain vertical restraints — between parties at different levels of the production or distribution chain. They fall under Art. 101 TFEU and Art. 15 PCA. Regulation (EU) 2022/720 (VBER) provides block exemption valid until 31 May 2034.

Exemption conditions

• Market share of each party not exceeding 30% on the relevant market;
• Absence of hardcore restrictions.

Hardcore restrictions (prohibited)

• Resale price maintenance (RPM) — franchisor cannot impose mandatory resale prices (only recommended or maximum);
• Absolute ban on passive sales outside the territory — only active sales can be restricted;
• Restrictions on end customers without justification.

Non-compete

• During the agreement — permissible without time restriction;
• Post-termination — up to 1 year, limited to the point of sale and the know-how.

Intellectual property in franchising

Trademark

The trademark is the central element. For licensing to the franchisee:

• Must be registered at the Bulgarian Patent Office, EUIPO for EU, or WIPO/Madrid for international protection;
• The licence is recorded in the relevant trademark register (Art. 24 TGIA);
• The licence may be non-exclusive or exclusive for the territory.

Know-how and trade secrets

Know-how — unregistered, but protected by:

• Contractual confidentiality;
• Trade Secret Protection Act (in force since 2019);
• Non-disclosure clauses surviving termination.

Patents and designs

If products are protected by patent or registered design, separate licensing agreements or specific franchise clauses are needed.

Practical scenarios

Scenario 1: Bulgarian franchisee of an international chain

A Bulgarian single-member LLC becomes franchisee of a US fast-food chain. Initial fee USD 45,000, continuing royalty 5% of turnover, marketing fee 3%.

• VAT Art. 97a registration — mandatory before the first payment.
• Reverse charge — self-assessment of 20% VAT.
• Withholding tax — 5% under Bulgaria-US DTT (5% for 10%+ participation; 10% for non-related) instead of 10% under CITA.
• DTT claim + tax residence certificate required.

Scenario 2: Bulgarian franchisor abroad

A Bulgarian LLC franchisor grants a master franchise in Poland. Receives EUR 50,000 initial fee + 6% royalty.

• Supply under Art. 21 VATA — recipient location (Poland) — outside Bulgarian VAT scope.
• CITA — income is taxed at 10% corporate tax in Bulgaria.
• The Polish payer withholds local tax — in Bulgaria a tax credit applies under the DTT (Art. 14 CITA).

Scenario 3: Franchise between related parties

A Bulgarian LLC pays royalties to its German parent company (100% participation).

• Withholding exemption under Directive 2003/49/EC (25%+ participation, 2+ years).
• Mandatory documentation: beneficial ownership declaration, substance of the German company.
• Transfer pricing — the rate must be arm’s length. 10% royalty versus a 5% market rate — NRA may adjust.
• See our article on related-party transactions.

Frequently asked questions