Operating Lease in Bulgaria — Legal Framework & Tax Treatment (2026)

What you will learn in this article

• The legal framework of operating leases under Art. 342–347 of the Commercial Act
• Key differences between operating and finance leases
• How to conclude an operating lease contract — form and content
• Rights and obligations of the lessor and lessee
• Tax treatment under CITA and VAT
• Accounting under NAS 17 vs. IFRS 16
• Subleasing rules and contract termination
• A practical example with a company vehicle

Legal framework — Art. 342–347 CA

The lease agreement is regulated in Art. 342–347 of the Commercial Act (CA). The operating lease (also called exploitation, ordinary, or genuine lease) is a contract under which the lessor provides an asset for use to the lessee in exchange for lease payments.

The key characteristic is that in an operating lease, the lessor is and remains the owner of the asset at the time of conclusion of the contract and throughout the entire term. Unlike a finance lease (Art. 342(2) CA), there is no obligation to transfer ownership in an operating lease, although this may be agreed (Art. 342(3) CA) — but the transfer requires a separate sale contract.

Lease payments in an operating lease have the character of rental payments — they are the price for use, not instalments for acquisition.

Operating vs. finance lease — key differences

Conclusion of contract — form and content

Form

The operating lease contract is concluded in written form. The law does not require notarisation for validity, but in practice notarisation of signatures is strongly recommended because:

• It allows the lessor to more easily obtain an order for payment from the court in case of non-payment (Art. 417 CPC).
• It provides additional legal certainty for both parties.

Content

The contract should include:

• Description of the asset (brand, model, identifier)
• Lease term
• Amount and frequency of lease payments
• Allocation of maintenance, insurance, and repair costs
• Early termination clauses
• Subleasing clause (if permitted)
• Allocation of the risk of accidental loss

Rights and obligations of the parties

Lessor

• Provides the asset in working condition
• Remains the owner of the asset and charges depreciation
• Bears the risk of accidental loss (Art. 345 CA), unless otherwise agreed
• Receives lease payments

Lessee

• Uses the asset according to its purpose
• Pays lease payments on the agreed schedule
• Maintains the asset in good condition
• Returns the asset upon expiry of the contract (in an operating lease)

Important: If the parties agree to transfer the risks and benefits of ownership to the lessee, this brings the contract closer to a finance lease and may lead to reclassification for tax and accounting purposes.

Tax treatment under CITA

For CITA (Corporate Income Tax Act) purposes, lease payments in an operating lease are a current expense for the lessee. No asset is capitalised and no depreciation is charged by the lessee.

This is a significant advantage: payments reduce the tax base in the period of their accrual, without the need to spread them over the useful life of the asset.

For the lessor:

• The asset remains on the balance sheet and is depreciated under CITA
• Lease payments are income for the lessor

Tax treatment under VAT

Operating lease = supply of services

For VAT purposes, a classic operating lease is a supply of services (periodic) under Art. 9 of the VAT Act. VAT is charged on each lease payment on the date of the chargeable event (usually monthly) at the standard rate of 20% (Art. 66 of the VAT Act).

When can an operating lease be a supply of goods

Under Art. 6(2)(3) of the VAT Act, if the operating lease contract includes clauses for transfer of risks and benefits of ownership, the sum of payments is approximately equal to the market value of the asset, and transfer of ownership is subsequently agreed, the lease may be deemed a supply of goods. In such case:

• VAT may be charged once upon delivery of the asset
• The regime is analogous to a finance lease

Accounting — NAS 17 vs. IFRS 16

Under NAS 17 (National Accounting Standards)

NAS 17 preserves the distinction between operating and finance leases:

• Operating lease = off-balance-sheet for the lessee. Payments are recorded as a current expense in the income statement. No asset is recognised on the balance sheet.
• Finance lease = on-balance-sheet. An asset and lease liability are recognised.

Under IFRS 16 (effective from 01.01.2019)

Under IFRS 16, the approach is fundamentally different: the lessee recognises a right-of-use asset and a lease liability for all leases with a duration over 12 months, without distinction between operating and finance.

This means a company applying IFRS will show significantly more assets and liabilities on its balance sheet compared to a company under NAS.

Subleasing

Subleasing (providing the leased asset to a third party) is permitted only with the lessor’s consent. Without such consent, the sublease is void, although it may be subsequently ratified (confirmed).

This rule is analogous to sub-renting under the Obligations and Contracts Act and protects the owner’s interest.

Termination of the contract

An operating lease contract may be terminated upon:

• Expiry of the term — the most common ground
• Early termination — by mutual agreement or for non-performance (after appropriate notice)
• Rescission by the performing party for material breach

Upon termination, the lessee must return the asset in the condition in which it was received, allowing for normal wear and tear.

If the contract includes a purchase option (Art. 342(3) CA), the transfer of ownership is effected through a separate sale contract.

Practical example — operating lease of a vehicle

Parameters

• Vehicle value: BGN 40,000 (EUR 20,454) excl. VAT
• Lease term: 48 months
• Monthly lease payment: BGN 900 (EUR 460) excl. VAT
• Total payments: BGN 43,200 (EUR 22,090)
• Residual value: return of vehicle (no purchase option)

Tax treatment for the lessee

Under CITA:

• Each monthly payment of BGN 900 is a current expense reducing the tax base
• Annual expense: BGN 10,800 — tax saving at 10% rate: BGN 1,080 (EUR 552)
• The asset is NOT on the lessee’s balance sheet (under NAS 17)

Under VAT:

• VAT on each payment: 900 x 20% = BGN 180
• Monthly tax credit: BGN 180
• Total VAT over 48 months: BGN 8,640, with the lessee using the full tax credit

Important for VAT on vehicles: For passenger cars, the right to tax credit may be restricted if the vehicle is also used for personal purposes.

Practical tips

1. Be careful with classification. If you include clauses for transfer of risks and benefits in the contract, you risk reclassification from operating to finance lease, with all tax and accounting consequences.
2. Notarisation. Have the signatures notarised — this gives you the right to fast order-for-payment proceedings in case of non-payment.
3. Clearly allocate costs. Specify who pays insurance, maintenance, and repairs. This prevents disputes.
4. Check the accounting standard. If you apply IFRS, even a “pure” operating lease is reflected on the balance sheet.
5. Flexibility without large investment. An operating lease is a good way to use equipment without a large initial investment.

Frequently asked questions

Conclusion

The operating lease is a flexible and tax-efficient instrument for using assets without acquiring ownership. Proper classification is essential — any transfer of risks and benefits may reclassify the contract as a finance lease with different tax and accounting consequences.

If you need assistance with a lease agreement, the team at Innovires Legal can help you draft or review the contract, ensure proper tax treatment and advise on the accounting implications. Contact us for a consultation.

This article is for informational purposes only and does not constitute legal advice. For a specific case related to a lease agreement, please consult a qualified lawyer.