Bulgaria - Market Insights

Treaty relief for transparent entities in Bulgaria

Double tax treaties (DTTs) matter, right? And one should be able to rely on the tax administrations of the respective treaty countries to apply them. Well, it could get somewhat trickier than expected in some cases. Especially when these cases involve transparent entities, which are a “strange” animal for some tax jurisdictions, such as Bulgaria.

How could a US transparent entity benefit from a DTT with Bulgaria

Since transparent entities in the US are often used for corporate structuring purposes when foreign or US investments into Bulgaria are concerned, the Bulgarian tax administration has already considered the specifics of such entities and has provided certain guidelines in that respect.

In addition, Article 1, paragraph 6 of the DTT with the US explicitly regulates transparent entities and has been used as grounds by the Bulgarian tax administration to allow treaty benefits to members of transparent entities. It specifies that: “An item of income derived through an entity that is fiscally transparent under the laws of either contracting state shall be considered to be derived by a resident of a contracting state to the extent that the item is treated for purposes of the taxation law of such contracting state as the income of a resident.”

That allows some clarity for transparent US partnerships, and LLCs, including law firms organised in LLP form, dealing with Bulgarian clients, that need to get their payment for services out of Bulgaria without any Bulgarian withholding tax charged at source.

Under Bulgarian law, foreign non-personified (including trusts, funds, etc.) and transparent entities (e.g. any LLP, or a Delaware LLC), are also deemed a separate tax obligor for tax purposes and are recognised as a separate participant in the tax procedures or process of relevance, including for application of treaty relief.

The procedure involves claiming treaty relief under a formal process when a certain materiality threshold is exceeded, under which a set of documents should be filed in advance of payment.

The relief claim form for a partnership, for example, is to be accompanied by:

• A certificate of tax residence obtained for the partnership, to the extent possible, as well as for each partner in it.
• A declaration by the due representative of the partnership, as well as by each of the partners of such transparent partnership certifying respective circumstances of importance. Those would refer to:
  • beneficial ownership of the income received; and
  • lack of permanent establishment in Bulgaria to which the respective income could be connected.

In terms of legal technique, a certificate listing all partners, as well as a single form declaration countersigned by each and every partner in a partnership (as a list of the partners) is also a possible alternative to be presented for the purpose of such procedure.

The other standard documents to be enclosed include the certifying documents for the respective income, such as the contract, invoices and the accounting information of relevance to support the respective income for which relief is requested. The representative powers for the applicant entity and its signatory for such treaty relief should also be identified through a certificate of good standing for the entity (e.g. a certificate of incumbency, issued by the entity’s secretary), confirming the due representative and a power of attorney in favour of the respective signatory for the treaty relief claim and enclosures. The assistance of the Bulgarian payer of respective income is also to be organised, as this payer should execute one of the pages of the claim detailing the accounting information on the income for which treaty relief is to be authorised.

The Bulgarian tax administration has a 60-day term to issue its statement in confirmation of the application of the respective treaty relief. The statutory term could be prolonged if additional documents have been requested to be presented by the applicant entity. If no statement denying such treaty relief is issued within the prescribed term, the treaty relief could be deemed applicable by the parties involved and the Bulgarian payer of the respective income could complete the payment of the respective income to the US transparent entity without any Bulgarian withholding tax of 10%.

In rare occurrences where income is below the threshold of EUR 255,646 per annum (prior to the official introduction of the euro as the currency in Bulgaria as of 1 January 2026, this was BGN 500,000) payable to a foreign recipient, no formal claim is to be filed and no statement by the Bulgarian tax administration is to be requested, but the two significant underlying documents, namely the tax residence certificate and the declaration should be made available to the Bulgarian payer of the income, in view of a potential tax audit of the latter.

If the Bulgarian payer decides to transfer the respective income to the US beneficiary without withholding the Bulgarian corporate income tax due of 10% (e.g. for any passive income, other than dividends, for which the rate is fixed at the lower 5%), it could be held jointly liable for any due tax, which by operation of law is for the account of the income recipient. When the applicable DTT provides for full exemption of the income involved, no tax or default interest could be assessed, but an administrative sanction could be imposed on the payer for failure to apply for treaty relief well in advance of the deadline for payment of the withholding tax. This penalty is set at 5% of the tax not paid, capped at EUR 7,669.

Other UK or EU transparent entities and treaty relief

If a non-personified partnership based in the UK or an EU Member State, including when operating through an EU branch, needs to benefit from a treaty relief for income payable by a Bulgarian counterparty, the provisions of the relevant DTT applicable to each of the partners therein should be carefully inspected whether or not it is providing for explicit regulation of such specific pass-through situations, as in the case with the US treaty. Absent such explicit regulations, complications could be expected from various perspectives. The tax administration, when confronted with such a complicated scenario as this, could request various types of additional documentation and information, including going as far as requiring explicit documentation demonstrating the proportions in which the partners in the transparent structure have agreed to allocate the income for the respective year in question.

If the partners in such a transparent structure [as this] are tax resident in different jurisdictions, and one combined claim is filed under the respective tax treaties in order to ensure a consistent review of the full set of documents by the inspecting team from the tax administration, the latter could request separate claims to be filed.

If separate claim forms are filed under each applicable treaty with corresponding sets of evidencing documents for the allocated portion of income, this could lead to other complications if, for example, they are distributed to different tax teams for review and for the issuing of a statement, which ultimately should not occur, but could theoretically be possible. If consistent review of such claims is procured by the tax administration, the additional requests for documents should be diligently complied with, in order to ensure a positive statement.

A branch could not rely on treaty relief

As a rule, a branch, whether of a transparent entity or not, cannot benefit from the relief offered under a treaty executed between Bulgaria and the country of establishment of the branch. Therefore, in such cases it is always the jurisdiction where the parent of the branch is established that should be considered when deciding what relief could be applied under the applicable treaty.

Key takeaways

Treaty relief, whether full exemption or a reduced rate, is possible for transparent entities under the Bulgarian treaty network of more than 60 treaties, subject to certain specifics. In some cases, the Bulgarian tax administration relies on explicit provisions of some treaties, such as the case with the US treaty, whereas in other cases they base their statements on accumulated case law and guidance from similar situations.

As always, it would be diligent to check the relevant treaty provisions in advance of receiving the respective Bulgarian-derived income in order to prepare for the required process and documentation and avoid prolonged post-payment complications.

The procedure for obtaining treaty relief is not complex or burdensome but should be considered in terms of timing as a needed step to allow free outflow of Bulgarian-derived income without any Bulgarian withholding taxation.