M&A in Bulgaria: Typical tax red flags by sector

Why local tax risks could be the hidden dealbreaker

• In the context of inbound M&A transactions in Bulgaria, tax is rarely the headline issue until it suddenly becomes one. Target companies often operate in good faith, but face challenges during due diligence when their existing practices fall short of regulatory expectations or diverge from how Bulgarian tax law is interpreted and enforced by the National Revenue Agency (NRA).
• These issues typically do not stem from deliberate non-compliance, but rather from a combination of limited internal tax capacity, reliance on external providers who may lack insight into the specific industry, unawareness of how local rules are applied in practice, and a tendency to follow what is commonly done in the “market” rather than what is technically compliant.
• As a result, areas that may seem routine can become material tax risks under audit or tax due diligence review. Identifying sector-specific tax risks early can make the difference between a smooth closing and heavily negotiated protection clauses, escrow holdback, or even a price cut.

Here is an outline of some often observed tax risks in Bulgaria per selected industry:

💻 Technology

• Equity incentive plan may carry tax liabilities

Stock options, RSUs, phantom shares or other share-based compensations granted by foreign parent companies are often not properly assessed for local tax implications. The provided share benefits may trigger tax obligations for the local subsidiaries as well as be subject to income tax and social security regardless of where the plan is administered.

• Misaligned transfer pricing model with IP involvement

Local IT companies may operate under a “cost-plus” TP model while performing high-value functions tied to group-owned IP. If some of the group C-level people are based in the local hub, then the risk of attributing DEMPE (development, enhancement, maintenance, protection and exploitation) functions around the intellectual property are carried out locally, there may be misalignment between the value drivers and the profit allocation model potentially leading to adverse tax effects.

• VAT treatment specifics of cross-border services

Service providers may misapply special VAT rules or incorrectly treat services when provided to individual customers (B2C). Mistakes are more common in the context of the EU OSS regime or services in markets operating a plethora of different GST or digital service taxes.

🌱 Renewables & Energy Projects

• Excessive interest deductions restricted under the existing interest-limitation rules

Renewable energy projects are often highly leveraged through shareholder or related-party loans. If interest expenses exceed the limits under Bulgarian tax rules (e.g. 30% of EBITDA or debt-to-equity thresholds), part or all of the deductions could be disallowed. Loans without proper documentation or market terms may also trigger scrutiny.

• Input VAT adjustments on construction over state-owned land

When construction (e.g. solar parks, PVs) is performed on land that is not owned by the taxpayer (such as state or municipal land under concession or right-of-use), in the past the right to deduct input VAT has been limited with the argument that such assets are not directly linked to taxable economic activity or are not part of the company's assets.

🏗️ Construction & Real Estate

• Challenges related to the substance of subcontractor arrangements

In the construction and real estate sector, it is common for businesses to engage a range of subcontractors for services, materials and other. Even where the taxpayer has acted in good faith, when limited documentation and unclear execution record is available, this may result in the denial of incurred expense deductibility, VAT recovery and withholding taxes on fees to foreign vendors.

• Tax risks related to intra-group property management services

Real estate entities often rely on related companies to provide administrative, technical, or strategic services related to property operation, such as tenant oversight, facility management, or other related to the operated real estate activities. If these services are invoiced cross-border or priced without clear documentation, their substance or arm’s-length basis may be questioned. This is especially relevant where fees appear excessive compared to local activity or where no deliverables or contracts are available.

🏭 Manufacturing & Industrial

• Transfer pricing risk from inter-company relations

Manufacturing subsidiaries that source raw materials or components from related parties abroad often rely on group-set pricing formulas. When the local entity operates at a consistent loss or thin margin, the arm’s-length nature of the transfer pricing model may be examined, especially if no benchmarking or TP documentation is available.

• Overstated depreciation from misclassification of installations and equipment systems

Bulgarian tax law provides different maximum depreciation rates by asset category, but offers no rules or binding guidance on how to categorize complex assets such as special installations and systems. Taxpayers often apply higher rates to building-related components or complex systems, arguing with the tax authorities that they should not be treated differently i.e., with lower depreciation rates.

• Scrap and inventory deviations without sufficient justification

Manufacturing businesses often record scrap, losses, or shortages due to production inefficiencies, damaged materials оr process variability. However, a common risk arises when such deviations are not properly documented, justified by technical norms, or reconciled with inventory records. In such cases, they may be viewed as unreported sales or unjustified write-offs, potentially leading to negative tax consequences.