Substance Requirements for Bulgarian Companies in the EU

Why substance suddenly matters more

The EU's ATAD III ("Unshell") proposal, ongoing BEPS Action 6 enforcement, and an aggressive CFC posture from countries like Germany, France, and Italy mean that a Bulgarian company without real substance can be disregarded by the founder's home jurisdiction — and its profits taxed there at the local high rate.

For an EU founder using a Bulgarian company, substance is no longer a "nice to have". It is the difference between paying 10% and paying 30-45%.

The substance test, in practice

Authorities look at a non-exhaustive list of factors:

1. Own premises in Bulgaria — a leased office (not a virtual office address)
2. Active bank account in Bulgaria — not just an EMI
3. At least one qualified director resident in Bulgaria — making real decisions
4. Employees or outsourced services performed in Bulgaria
5. Income from active operations, not passive flows
6. Place of effective management — board meetings, key contracts, strategic decisions

ATAD III formalises this into a gateway test (passive income, cross-border activity, outsourced administration) and substance indicators to be reported.

Place of effective management — the silent killer

If you live in Berlin and run a Bulgarian company entirely from your Berlin laptop, German tax authorities can claim the company is tax resident in Germany under place-of-management rules. The Bulgarian 10% becomes irrelevant; full German corporate tax applies on worldwide profit.

Mitigation: actually live in Bulgaria, or appoint a genuine local director with delegated authority and document board meetings on Bulgarian soil.

CFC (Controlled Foreign Company) rules

Most EU member states tax retained low-taxed foreign profits of CFCs at the parent's domestic rate. Bulgaria, at 10%, often qualifies as "low-taxed" by these definitions. A genuine substance file is the standard defence.

What "documentation" looks like

• Office lease + utility bills
• Director employment contract + payslips
• Board meeting minutes (held in Bulgaria, signed in Bulgaria)
• Bulgarian-resident director's address registration and tax certificate
• Day-to-day operational emails sent from Bulgarian IPs
• Local supplier contracts (accountant, legal, IT)

What raises red flags

• Director is the founder, who lives abroad
• Office is a coworking address used by 200 other companies
• Bank account is an EMI in Lithuania
• No employees
• Sole income is licensing or interest from a foreign related party

Bottom line

Substance is achievable cheaply in Bulgaria — a real lease, a real local director, real local accounting, real local banking. Build it from day one, document it, and the structure holds up to any EU enquiry.