By Ordinance No. H-3 of November 7, 2025, on the procedure and methods for applying the methods for determining market prices (the "Regulation"), applicable from 01.01.2026, a complete change is made to the existing sub-legislative regime for transfer pricing, regulated by the now repealed Ordinance No. H-9 of 2006.

Transfer pricing is a method for adjusting taxes due and determining prices for transactions (goods, services, intellectual property) between related parties within a group, based on market principles. The aim is to prevent tax avoidance by ensuring that profits are reported fairly where the value is created. The NRA uses various methods to determine the actual market conditions under which to treat the controlled transaction in question and to make adjustments on that basis.

The regulation is not just a technical update, but a qualitative transformation of the philosophy of transfer pricing in Bulgaria, as for the first time the Guidelines of the Organization for Economic Cooperation and Development (OECD, known as the OECD Transfer Pricing Guidelines) are explicitly and syste

matically introduced as a leading reference point for the interpretation and application of national legislation.

The rules for analysing the actual economic substance of controlled transactions, which examine the actual behaviour of the parties, the functions performed, the risks assumed, and the assets used, including when they do not fully correspond to the contractual framework, occupy a central place in the Ordinance.

This is an approach adopted by OECD, in which economic reality, rather than formal contractual arrangements, is of primary importance. As a result of the rules introduced, the tax authorities examine the actual economic behaviour of the parties and determine market conditions on that basis.

In view of this, when applying the Ordinance, the contractual terms are considered through the prism of the actual behaviour of the parties and the economic substance of the transaction. When determining market conditions, the decisive factors are who actually makes the key decisions, who exercises control over the risk, and who has the financial capacity to bear it.

For the first time in Bulgarian tax legislation, explicit rules based on the OECD Guidelines for risk allocation are introduced, which require the cumulative presence of:

1. functional control over risk (key decision-making);

2. financial capacity to bear the consequences of the risk.

The Ordinance significantly expands the analytical depth of transfer pricing by:

· allowing aggregation and segmentation of transactions when this more accurately reflects their economic substance;

· extending the analysis beyond the price parameter to the actual economic transaction;

· allowing analysis of the residual profit and contribution of the parties, including in complex value chains.

The increased value method is no longer applied mechanically, but with a view to the actual role of related parties, their contribution to value creation, and the economic logic of profit distribution.

The new regime for financial transactions between related parties is particularly significant. Such intra-group financing is subject to analysis equivalent to market credit, including in terms of debt capacity, interest terms, and independent credit profile, which in practice limits the automatic application of group ratings.

This approach significantly limits the automatic application of group credit ratings and financing under conditions that would not be available between independent parties.

The clearer and more detailed criteria achieve greater predictability in the application of the rules, but at the same time increase the requirements for documentation and economic justification on the part of the business. In practice, the new regime shifts the focus from formal documentation to the actual functioning of the group.

The new regime leads to greater harmonization with international standards, greater conceptual clarity, and a reduction in purely formal disputes. The challenges for businesses will be measured in terms of increased risk in the event of inconsistency between contracts and practice, the need for real economic substance behind each structure, as there will be a need for a real rethinking of intra-group models, rather than just a formal update of documentation.

This article has been prepared for and is part of the Legal Digest issued by Penkov, Markov & Partners. The publications therein do not constitute legal advice and are not binding. Penkov, Markov & Partners reserves all rights to this material, and any distribution thereof is subject to the prior written consent of the law firm.