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Bulgaria: Concept of permanent establishment

The definition of permanent establishment and the taxation of business profits are precisely inter-related and therefore can reasonably be considered common.

According to Corporate Income Tax Act (CITA), permanent establishment (PE) shall be:

  • A definite place (owned, rented or used on another ground), through which the foreign person implements fully or partially an economic activity in the country, for example: place of management, branch, trade representative office registered in the country; office; chamber; studio; factory; workshop (factory); shop; storehouse for trade; service shop; installation site; construction site; mine; quarry; drill; petrol or gas well; spring or another site for deriving natural resource;

  • The implementation of activity in the country by persons, authorised to conclude contracts on behalf of foreign persons, except for the activity of the representative with independent statute under chapter six of the Commercial Law;

  • Durable implementation of commercial transactions with place of fulfilment in the country, even when the foreign person has no permanent representative or a definite place.

As per the OECD Model Tax Convention on income and on capital, concept of PE is more of a technical term to be used as guidance in determining what constitutes PE in between the contracting states when concluding a double tax treaty. The purpose of conducting a business is to make profits and establishing a PE allows this as it is practicable and legally permissible to carry over business for an extended period of time in another country, without any necessary registration of a company. Each double tax treaty (DTT) contains only indicative and non-exhaustive list of different structures and locations that represent PE, such as branch, office, workshop, factory, etc. Since it is impossible to enumerate all the possibilities for activities that constitute a PE, the facts of each case should be analysed separately.

The CITA provides for that the conditions that an activity must meet to be considered as PE are as follow:

  • Presence of certain tangible place of business, such as building, plant, etc.

  • Persistence and stability of the exploitation of this place;

  • The business should be done through this place. That means the presence of person(s) who in one or another way are dependent on the enterprise and who operate in the country in which the place is.

In addition to above mentioned, PE starts to operate from the moment when the entity starts to implement all or part of its work through this place. Certain activities such as construction, installation and supervision activities are linked with a certain period (six to 12 months) to become a PE.

A foreign entity operating in Bulgaria does not constitute a PE if it is:

  • Through commercial representation, which serves only for information and advertising needs;

  • Through a subsidiary;

  • Providing services without using facilities in the country.

All foreign companies doing business in Bulgaria (including PE) are subject to obligatory registration in the local trade register agency.

Tax treatment of profits generated by PE

The general provisions of the OECD Model Convention on the taxation of business profits stipulate that the business profits shall be taxed only in the state where the enterprise is a resident. The other state is entitled to tax profits of such person only if they are realised through a PE on its territory. Prerequisites for the taxation of profits by the other state relating to the PE are:

  • Existence of a PE according to the requirements of the respective DTT;

  • The PE to be belonging to the resident of the other state party to the DTT;

  • Presence of business profits attributable to the PE.

The rules used by the state of PE to determine the attributable profit to it, are determined by its domestic law, keeping also the limitations set by the respective DTT like arm's-length principle and related expenses recognition. That means, all profit should be realised on the market principle, as well as each PE could recognise expenses attributable to it. Where the treaty on avoidance of double taxation, contains provisions different than the provisions of the domestic legislation, the provisions of the international convention are adopted.

It can be said that when a foreign entity forms a PE in Bulgaria, it becomes taxable person in accordance to the CITA and its profits, which are relevant, can be linked and resulted from the PE, will be subject to corporate income tax. Also it would be tax liable for withholding taxes, in the cases stipulated by law and alternative tax, for the activities subject of such taxation,

Simeon Grigorov (

Eurofast Global, Bulgaria

Tel: +359 2 988 69 77


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