Non-Deductible Expenses Under Bulgarian CITA — Tax Risks (2026)

What you will learn in this article

• What non-deductible expenses are and how they affect taxable profit
• The complete list of permanently non-deductible expenses under Art. 26 CITA
• Hidden profit distribution — definition, consequences and the 20% sanction
• Documentation requirements for expense recognition
• Personal use of company assets — tax treatment
• Entertainment expenses — the 50% deductibility rule
• Thin capitalization rules under Art. 43 CITA
• Top 10 errors found in NRA tax audits
• Temporary tax differences under Chapter 8 CITA

What are non-deductible expenses

When determining the taxable financial result under the Bulgarian Corporate Income Tax Act (CITA, known in Bulgarian as ZKPO), the accounting financial result is adjusted — increased or decreased — by specified amounts. Among the most significant increases are so-called non-deductible expenses — accounting expenses that are not recognized for tax purposes and which increase the taxable profit.

Non-deductible expenses are accounting expenses that a company has recorded in its financial statements but which are not recognized for the purposes of determining taxable profit. These expenses are added back to the accounting financial result — increasing it — and thereby increasing the corporate tax due.

There are two types:

• Permanent tax differences (Art. 26 CITA) — expenses that are never recognized for tax purposes
• Temporary tax differences (Chapter 8 CITA) — expenses not recognized in the year of recording but recognized in a different year upon the occurrence of a specified condition

Complete list under Art. 26 CITA — Permanent tax differences

Hidden profit distribution (Art. 267 CITA)

Hidden profit distribution is one of the most serious tax violations and triggers threefold consequences.

Definition (§ 1(5) Supplementary Provisions of CITA)

a) Amounts unrelated to the activity or exceeding market levels, accrued, paid or distributed in any form in favour of shareholders, partners or persons associated with them (excluding dividends). Examples include:

• Business trips of the owner without any business justification
• Purchasing personal items from the company account
• Paying associated persons for services at prices exceeding market levels
• Providing interest-free loans to the owner

b) Interest on loans when three of the following four conditions are met (§ 1(5)(b) Supplementary Provisions of CITA):

• The loan exceeds the borrower’s equity as at 31 December of the previous year
• There is no fixed term for repayment
• The repayment or interest amount depends on the existence or level of the borrower’s profits
• Repayment is contingent on satisfying other creditors

Consequences upon discovery

1. Non-deductible expense — the amount is added to the taxable financial result (Art. 26(11) CITA)
2. 5% dividend tax — the amount is treated as a dividend and subject to a final tax of 5% (Art. 38(3) PITA)
3. 20% monetary sanction — under Art. 267(1) CITA, a sanction of 20% is imposed on the amount of the hidden profit distribution

Important: The 20% sanction is not imposed if the hidden profit distribution is declared in Part VII of the annual tax return under Art. 92 CITA (Art. 267(2) CITA). Therefore, if the owner has used company funds for personal purposes, it is critical that this is declared in the annual return.

Documentation requirements

Lack of proper documentation is the most frequent reason for the disallowance of expenses during tax audits. Under Art. 10 CITA, an expense must be supported by a primary accounting document containing the mandatory requisites under the Accountancy Act to be considered documented.

What is not sufficient

• Cash register receipt without an invoice — a receipt proves payment but does not contain the buyer’s data and is insufficient for expense recognition
• Invoice without requisites — missing supplier/buyer data, missing values, unclear description of the supply
• Fictitious invoices — invoices from non-existent suppliers or for undelivered goods/services

What the NRA requires in practice

• Invoice with all requisites under Art. 7 of the Accountancy Act
• Contract, acceptance protocol or other document confirming the supply took place
• Proof of payment (bank statement, cash receipt)
• For significant amounts — additional evidence of reality (correspondence, transport documents, photographs, etc.)

Personal use of company assets

When employees, managers, owners or associated persons use company assets (vehicles, phones, property) for personal purposes, tax consequences arise.

Vehicles

For mixed-use company vehicles (business and personal), the employer has two options:

Option 1: Tax on expenses in kind (Art. 204(1)(4) CITA) — expenses attributable to personal use (proportional to personal kilometres) are taxed at a rate of 10%. They are not included in the individual’s taxable income.

Option 2: Taxation as income under PITA — personal use expenses are included in the individual’s taxable income and subject to 10% income tax + social security contributions.

If the split between business and personal use is not documented, the NRA may deem 100% personal use and disallow the entire expense + impose penalties.

Phones and electronics

Expenses for mobile phones and other devices used for personal purposes are treated analogously. Companies are advised to have an internal policy defining usage rules.

Entertainment expenses (50% deductible)

Entertainment expenses warrant special attention as they are subject to dual tax treatment:

1. 50% of entertainment expenses are not deductible for VAT purposes — no input VAT credit may be claimed (Art. 70(1)(3) VATA)
2. The recognized 50% is subject to tax on expenses at 10% (Art. 204(1)(1), Art. 216 CITA)

What constitutes an entertainment expense? Under Art. 62 of the VATA Implementing Regulations: expenses for receiving, hosting and seeing off guests and delegations; accommodation; food and beverage consumption; business meetings; celebrations; entertainment events; excursions.

What is NOT an entertainment expense: Expenses for symposia, congresses, conferences and similar events directly related to the presentation or testing of goods/services (Art. 62(2) VATA Implementing Regulations).

Example: A company spent EUR 5,000 on business dinners and client receptions. Tax treatment:

• VAT credit: claimed only for 50% = EUR 2,500 → VAT credit EUR 500
• Tax on expenses: 50% × EUR 5,000 = EUR 2,500 × 10% = EUR 250
• Total additional tax: EUR 250 + unclaimed VAT EUR 500 = EUR 750

Thin capitalization (Art. 43 CITA)

Thin capitalization rules limit the amount of interest expenses that a company may deduct for tax purposes when it is excessively financed through debt rather than equity.

Rule (Art. 43(1) CITA)

Interest expenses are not deductible if: Borrowed capital (loans) exceeds 3 times equity (debt-to-equity ratio > 3:1).

Formula for non-deductible interest (Art. 43(3) CITA)

Non-deductible interest = Total interest expenses − (Total interest income + 0.75 × Taxable profit before interest)

If the result is negative or zero — no limitation applies; all interest is deductible.

Exceptions

The thin capitalization rule does not apply to:

• Credit and financial institutions (banks, insurers)
• Interest on loans from non-financial institutions where the equity-to-debt ratio does not exceed 3:1

Carry-forward of non-deductible interest

Non-deductible interest expenses may be recognized in the following 5 tax years if the conditions are met in those years (Art. 43(4) CITA).

Top 10 errors found in tax audits

Based on NRA practice, here are the most common findings in tax audits:

1. Cash receipts without invoices — companies record expenses supported only by a cash register receipt. The NRA disallows these expenses due to lack of documentation.
2. Fictitious supplies — invoices from “shell” companies for services never actually provided (especially prevalent for consulting and marketing services).
3. Personal expenses of the owner — purchases of personal items, business trips without business purpose, fuel for personal vehicle use without a trip log.
4. Expenses without a contract — significant amounts for services without a written contract, acceptance protocol or other supporting evidence.
5. Loans to shareholders/managers — interest-free or below-market loans, which the NRA reclassifies as hidden profit distribution.
6. Inflated prices from associated persons — purchases of goods or services from associated persons at prices significantly exceeding market levels.
7. Entertainment expenses treated as ordinary — business lunches and dinners recorded as “material expenses” or “transport costs” instead of entertainment expenses.
8. Unrecognized depreciation — depreciation on assets not used for the business activity, or depreciation using rates different from those specified in Art. 55 CITA.
9. Donation expenses — donations to persons or organizations outside the exhaustive list in Art. 31 CITA (up to 10% of accounting profit).
10. Interest under thin capitalization — companies financed primarily through owner loans without observing the limitations under Art. 43 CITA.

Temporary tax differences (Chapter 8 CITA)

Unlike permanent differences, temporary tax differences are not lost forever — they “reverse” in a different year:

Frequently asked questions

Conclusion

Non-deductible expenses are among the most common causes of additional tax liabilities identified during NRA audits. Proper classification of expenses, adequate documentation, and awareness of the rules on hidden profit distribution, entertainment expenses and thin capitalization are essential for every Bulgarian company.

If you need assistance with the tax treatment of specific expenses under CITA, the team at Innovires Legal can provide a detailed consultation and help you minimize tax risks. Contact us for a consultation.

This article is for informational purposes only and does not constitute legal advice. For specific questions regarding the tax treatment of expenses under CITA, please consult a qualified professional.