The Bulgarian Supreme Administrative Court, by judgment in Case No. 2048/7967/2024, issued in January 2025, resolved a significant Transfer Pricing dispute involving Sofia Med AD, a manufacturer of copper and copper alloy products, and its related party STEELMET, based in Cyprus.
Background
During a tax audit, the Bulgarian tax administration examined transactions between Sofia Med AD and STEELMET, specifically regarding contracted services, which include market research, customer identification, and assistance in commercial promotion. These services were initially remunerated based on the tonnage of products sold but subsequently calculated as a percentage of net sales. This modification in the calculation formula drew the attention of the tax authorities, who considered that the methodology applied did not guarantee the correct determination of the market value.
Observations of the Tax Authority
The tax administration pointed out that the company had not adequately supported the economic value of the services received, nor had it provided an analysis to verify that the transaction conditions were comparable to those of independent companies. In addition, the authorities expressed doubts concerning the economic substance of the services invoiced, i.e., they questioned whether they had actually generated a concrete or measurable benefit for Sofia Med AD. Hence, tax adjustments affecting the deductibility of the payments made to the related party in Cyprus were proposed.
Decision of the Supreme Administrative Court
In the ruling, the Supreme Administrative Court largely upheld the tax authority’s findings and partially reversed the lower court’s decision, which was initially favorable to the company. The ruling highlighted that the taxpayer had not convincingly demonstrated that the services received generated real economic value, nor had it adequately supported the employed methodology to set the remuneration for such services. The court also noted that the mer contract among related parties does not guarantee the tax deductibility of the payments, especially when there is a lack of evidence to support the effective utility of the services.
The decision reaffirms the principle of substance over form, emphasizing that the economic situation must prevail over the legal transactional structure. Consequently, an intra-group service expense to be tax deductible must prove its contractual existence and, if necessary, effectiveness and relevance for the business activity.
Implications of the Case
This ruling clearly warns multinational companies about the relevance of maintaining solid and consistent Transfer Pricing documentation. Describing the services rendered or their contractual terms is not enough, but support that those services generate a tangible benefit for the recipient entity and that the agreed remuneration reflects market conditions is also crucial.
Likewise, the case highlights the attention paid by European tax administrations to related party transactions in foreign jurisdictions. Thus, taxpayers must be prepared to support the amount paid and the economic rationale behind the arrangement, the method of calculation adopted, and the choice of appropriate comparables.
Conclusion
The Sofia Med AD vs. Bulgarian Tax Administration case is a significant precedent in auditing intra-group services, emphasizing the need to correctly apply the Arm’s Length, economic substance, and documentary transparency principles. For companies operating internationally, this ruling reminds us that tax criteria are not satisfied by contractual formality alone but by a sound assessment of the value provided by related party transactions.
TPC Group Advice
At TPC Group, we have an experienced Transfer Pricing and International Taxation team at your disposal to advise you on corporate restructuring processes, ensuring regulatory compliance, and optimizing your tax position. Contact us for a customized consultation.
Source: TPCases