Related Party Loans in Bulgaria — Tax Risks and Rules (2026)

Who Are Related Parties

The concept of “related parties” is defined in §1, item 13 of the Supplementary Provisions of the Corporate Income Tax Act (CITA), which refers to §1, item 3 of the Tax and Social Insurance Procedure Code (TSIPC). According to this definition, related parties include:

• Spouses, relatives in a direct line, collateral relatives up to the third degree, and in-laws up to the second degree inclusive.
• Employer and employee — the relationship between them is considered a related party relationship.
• Partners/shareholders — persons who participate in the management or capital of the same legal entity.
• Manager and company — a person who exercises management and control, and the legal entity in which they perform that function.
• Person holding more than 5% of shares — a person who owns more than 5% of the shares or stakes in a company, and the company itself.
• Persons where one is a member of a management or supervisory body of the other person’s legal entity.

Critical point: the owner of an EOOD (sole owner of the capital) and the company itself are always related parties. This means that every transaction between them — including loans — is subject to special tax scrutiny.

The circle of related parties is broad and includes indirect connections. For example, if two companies share a common partner holding more than 5%, they are also considered related parties to each other.

Transfer Pricing for Loans

Articles 15 and 16 of CITA establish the arm’s length principle for transactions between related parties. Under Art. 15, when related parties carry out commercial and financial transactions under conditions that differ from those between unrelated parties, the tax base is determined without taking those conditions into account.

What does this mean in practice?

The interest rate on a loan between related parties must be at market rate — i.e., comparable to the interest that would be agreed between independent (unrelated) parties under analogous conditions. The market interest rate is determined based on:

• The loan amount and currency
• The repayment term
• The availability of collateral
• The creditworthiness of the borrower
• Interest rate levels in the banking market for comparable loans

Interest-free loans = deviation from taxation

Art. 16 of CITA explicitly provides that for transactions between related parties carried out under conditions whose execution leads to a deviation from taxation, the tax base shall be adjusted. Interest-free loans between related parties are a classic example of deviation from taxation.

In such cases, the National Revenue Agency (NRA) will impute a deemed interest income — i.e., it will assume that the lender received market-rate interest even if none was actually charged, and will increase the tax base accordingly.

Hidden Profit Distribution

Hidden profit distribution is defined in §1, item 5 of the Supplementary Provisions of CITA. These are amounts accrued, paid, or distributed in favor of partners, shareholders, or persons related to them, when:

• The amounts are not related to the company’s business activity, or
• The amounts exceed the market level for the analogous type of transaction.

Tax consequences

When hidden profit distribution is established, three cumulative penalties apply:

1. Non-deductible expense — the amount classified as hidden profit distribution is not recognized for tax purposes and increases the tax base for corporate income tax (10%).
2. 5% final withholding tax — under Art. 38(3) of the Personal Income Tax Act (PITA), hidden profit distribution is subject to a 5% final tax at source.
3. 20% penalty — under Art. 267 of CITA, a property sanction of 20% of the hidden distribution amount is imposed. Important: this penalty does not apply if the taxpayer has self-declared the hidden distribution in the annual tax return (Part VII).

Typical examples of hidden profit distribution in loans

• Withdrawing funds without documentation — the owner withdraws amounts from the company account and records them as a “loan” but without a written contract, without interest, and without a genuine intention to repay.
• “Advances” without reporting — paying out amounts as business advances that are never accounted for or returned.
• Personal expenses charged to the company — covering the owner’s personal expenses (car, vacation, home renovation) with company funds, recorded as a “loan” or “business expenses.”

Thin Capitalization (Art. 43 CITA)

Thin capitalization rules are regulated in Art. 43 of CITA and aim to limit excessive financing of companies through loans rather than equity. When borrowed capital (loans) significantly exceeds equity, part of the interest expenses is not recognized for tax purposes.

Debt-to-equity ratio: 3:1

The key ratio is 3:1 — if the company’s borrowed capital exceeds its equity by more than three times, part of the interest expenses is subject to tax adjustment (non-recognition).

Formula for non-deductible interest

Non-deductible interest expenses are determined by the following formula:

Non-deductible interest = Total interest expenses × (1 − 3 × Equity / Borrowed capital)

The formula applies when borrowed capital exceeds three times the equity.

Exceptions

• Bank loans — interest on bank loans is generally not subject to thin capitalization restrictions, unless the loan is provided between related parties or guaranteed by a related party.
• Lease agreements — finance leases are subject to the same restrictions.

Carry-forward of non-deductible interest

Since 2019, non-deductible interest expenses can be carried forward without time limitation. In subsequent tax years, if the debt-to-equity ratio improves and the company meets the conditions, previously non-deductible interest can be recognized.

Interest-Free Loans — Specific Risks

Interest-free loans between related parties are extremely common in practice, especially in EOODs where the owner provides funds to the company or vice versa. However, the tax authorities have a clear and consistent position on the matter.

NRA’s position

The NRA treats interest-free loans between related parties as a deviation from taxation under Art. 16 of CITA. The logic is straightforward: in a transaction between unrelated parties, the lender would receive interest for the funds provided. When related parties agree on zero interest, they deviate from market conditions.

What does the NRA do during an audit?

• Imputes deemed interest income on the lender at market rates — typically based on interest levels for comparable bank loans.
• Increases the lender’s tax base by the amount of the deemed interest.
• For a loan from an individual to a company — the deemed interest is subject to personal income tax.
• For a loan from a company to an individual (owner) — it may also be classified as hidden profit distribution.

Burden of proof

Formally, the burden of proof for the existence of a deviation from taxation lies with the tax authorities. In practice, however, the taxpayer must have comprehensive documentation justifying the loan terms in order to effectively defend their position during an audit.

Loan Reporting Obligations

Art. 50 of PITA and Appendix 11 to the annual tax return establish an obligation to report loans provided or received by individuals.

Reporting thresholds

Penalty for non-reporting

Failure to comply with the reporting obligation results in a penalty of 10% of the undeclared amounts. Given the size of the potential penalty, reporting should not be neglected.

Deadlines

Reporting is done through the annual tax return under Art. 50 of PITA, with a deadline from 10 January to 30 April of the following year. Loans are declared in Appendix 11 — “Provided/received cash loans.”

The reporting obligation also applies to loans provided to or received from related parties, including to/from one’s own company.

Required Documentation

Since 01.01.2020, special transfer pricing documentation requirements have been in effect, introduced by Ordinance H-9 of 2018 (updated by Ordinance H-3 of 2026).

Thresholds for mandatory TP documentation

• Loan principal: above EUR 511,292 (BGN 1,000,000) — mandatory transfer pricing documentation.
• Loan interest: above EUR 25,565 (BGN 50,000) — mandatory transfer pricing documentation.

Even below these thresholds, the tax authorities may request justification for the market nature of the interest rate during an audit.

What documents should you have?

Regardless of the mandatory TP documentation thresholds, for every loan between related parties we recommend having the following documents:

1. Written loan agreement — with all essential terms: parties, amount, currency, interest rate, repayment term, collateral (if applicable), penalties for late payment.
2. Repayment schedule — a clear schedule for repaying principal and interest, aligned with the borrower’s cash flows.
3. Market interest rate analysis — a documented analysis justifying why the chosen interest rate is at market level. This may include references to the BNB base interest rate, bank offers for comparable loans, and statistical data.
4. Accounting records — complete and accurate recording of the loan, interest, and repayments in the accounting records of both parties.

Ordinance H-3 of 2026

From 2026, Ordinance H-3 introduces updated rules for transfer pricing documentation. The ordinance establishes more detailed requirements for describing the functions, risks, and assets of related parties, as well as the methods for determining market prices.

Practical Advice

To minimize tax risks in related party loans, we recommend the following measures:

1. Always execute a written agreement

   The agreement must contain all essential terms — amount, interest, term, repayment schedule, collateral. Verbal arrangements will not protect you in a tax audit.

2. Charge market-rate interest

   Refer to the BNB base interest rate and commercial bank rates for comparable loans. Document your analysis. An interest-free loan is a red flag for the NRA.

3. Prepare a realistic repayment schedule and follow it

   The schedule should be aligned with actual cash flows. A loan that goes unrepaid for years is an indicator of hidden profit distribution.

4. Maintain a debt-to-equity ratio below 3:1

   If borrowed capital exceeds three times the equity, interest expenses will be partially non-deductible. Consider increasing the share capital or making additional contributions under Art. 134 of the Commerce Act.

5. Report loans in the annual tax return

   Individuals report in Appendix 11 of the annual return under Art. 50 PITA. The company reports in the annual return under Art. 92 CITA, including in Part VII if hidden profit distribution exists.

6. Consider the alternative: dividends

   Dividend distribution with a 5% final tax may be more efficient and risk-free than an informal loan. The total effective tax rate for dividends is 15% (10% corporate tax + 5% dividend tax) — without transfer pricing risks.

7. All transactions through a bank account

   Avoid cash payments. Bank transfers create a clear trail and evidentiary value during an audit. Cash payments above BGN 10,000 are also legally prohibited.

8. Prepare TP documentation when thresholds are exceeded

   For loans with principal above EUR 511,292 or interest above EUR 25,565 — transfer pricing documentation under Ordinance H-3 is mandatory.

Frequently Asked Questions