The Bulgaria vs. Lukoil case, currently under review by the Bulgarian Supreme Administrative Court (Case No. 8574/2025), sets an interesting precedent in Transfer Pricing, as it addresses two particularly sensitive areas for tax administrations: Pricing in intra-group commercial transactions and the valuation of related-party financial transactions, particularly related-party loans.
The dispute arises from audits on Lukoil Bulgaria EOOD, a company engaged in fuel distribution in Bulgaria, regarding its transactions with related companies of the Lukoil group during the 2017 and 2018 fiscal years.
Intragroup Supply Transactions and Margin Analysis
One of the central issues in the case concerns wholesale fuel supply transactions between Lukoil Neftohim Burgas AD, as producer, and Lukoil Bulgaria EOOD, as distributor. The Bulgarian tax administration questioned the reasonableness of the purchase prices under the Arm’s Length Principle, arguing that the local distributor had lower operating margins (EBIT: Earnings Before Interest and Taxes) than those observed in comparable independent companies.
From a tax perspective, this situation would imply that intra-group purchase prices were inflated, transferring profits to the producer and artificially reducing the tax base in Bulgaria. Consequently, the authority used the distributor’s operating result as an indirect indicator to support a Transfer Pricing adjustment.
Conversely, Lukoil’s defense argued that the isolated use of the EBIT does not demonstrate sufficient evidence of non-compliance with the Arm’s Length Principle. In particular, it indicated that specific economic and accounting factors, such as inventory management, variations in international crude oil prices, and high levels of depreciation, influenced the operating performance, which affects the operating margin without necessarily reflecting non-comparable prices in the purchased inputs.
The company also presented alternative analyses based on gross margins, which, according to its argument, were within the market ranges observed in independent distributors, thus questioning the methodology used by the tax authorities.
Intragroup Loan and Implicit Guarantee Rating
The second relevant component of this case concerns an intragroup loan of USD 150 million, initially granted by LUKOIL Europe Holdings B.V. and subsequently assigned to LUKINTER Finance B.V. The tax authority considered that the interest rate applied did not reflect market conditions, arguing that the loan should be analyzed as financially secured, given its membership in a multinational group with significant economic backing.
Under this approach, the administration compared the transaction with secured third-party loans, concluding that the rate applied was excessive and constituted an indirect benefit to the lender, which could be treated as a hidden profit sharing.
Conversely, Lukoil argued that the contract expressly established an unsecured loan, so the comparison with secured transactions lacked a technical basis. Furthermore, it argued that a corporate relationship does not, in itself, entail an implicit guarantee, a criterion subject to extensive debate in international financial Transfer Pricing circles.
Technical Relevance and Possible Implications
The Supreme Administrative Court admitted key evidence, including contracts, loan assignments, and references to international fuel prices, closing the oral phase of the proceedings. Although the final ruling has not yet been published, the case is already relevant because of the technical criteria raised, especially regarding:
- The use of the operating margin as indirect evidence of non-Arm’s Length pricing.
- The need to analyze specific economic factors before concluding that there are adjustments.
- The distinction between secured and unsecured loans in intragroup financial transactions.
This case highlights the relevance of thorough documentation, efficient functional analysis, and precise characterization of transactions, precisely in regulated and volatile industries such as the energy sector.
Specialized Technical Transfer Pricing Support
TPC Group is a Transfer Pricing firm that advises business groups and multinationals on the structuring, documentation, and defense of intragroup transactions, either commercial or financial. Our approach combines advanced economic analysis, international regulatory knowledge, and experience in tax disputes, enabling companies to anticipate risks, strengthen their technical position, and respond robustly to audits and litigation.
Source: TPCases