The rise of remote and hybrid work has blurred not just the boundary between professional and personal life, but also the tax boundaries between countries. For foreign companies a deceptively simple arrangement such as a person at a laptop in a Sofia apartment, can have significant corporate tax consequences. With this article we would like to offer a brief overview of the issue, how Bulgarian tax authorities currently approach it, and where the law is heading.
A permanent establishment ("PE") is one of the foundational concepts of international tax law. It is the threshold beyond which a foreign company's presence is considered sufficiently substantial to justify taxation of the profits derived from its business within the country. In simple words, if it is deemed that a foreign company has a PE in Bulgaria, the profit of this PE will be taxable as if it was a local company.
Under the OECD Model Tax Convention which Bulgaria implements primarily in its tax treaties, a PE is generally defined as "a fixed place of business through which the business of an enterprise is wholly or partly carried on." Under Bulgarian domestic law, the concept is set out in §1, item 5 of the Supplementary Provisions of the Tax Procedure Code ("TPC") and is broadly consistent with this definition. For Bulgarian tax purposes, a PE is generally assessed under the criteria provided in the TPC and the Corporate Income Tax Act ("CITA"), and where applicable - the relevant treaty for avoidance of double taxation ("DTT"). The PE concept generally requires three cumulative conditions:
The normalization of remote work has brought the home office into the PE debate. The scenario is increasingly common: a foreign company has an individual working from their home in Bulgaria, carrying out core business activities on the company's behalf. No office is leased, no branch is registered, no formal presence is established. And the usual question arises - could this form a PE for the foreign company?
The answer is very "lawyerly" - potentially yes, but it depends.
The absence of a formal office does not, in itself, prevent a PE from being formed. The key is the specific facts and circumstances, including whether the work from home is intermittent and incidental, or continuous, and whether the enterprise has effectively required the individual to use the home office (e.g. by not providing an office where the nature of the role clearly requires one).
The risk is particularly high in cases where the individual working from Bulgaria is not merely a rank-and-file employee, but also the owner and/or director of the foreign company, with full authority to act on its behalf. In such cases, the line between the individual's personal presence in Bulgaria and the company's business presence in Bulgaria becomes very thin.
The National Revenue Agency’s ("NRA") approach is grounded оn the OECD Commentary framework.
The NRA's starting point is that employee home office use does not automatically mean the home is "at the disposal" of the enterprise for PE purposes, and each case must be assessed on its own facts. However, the NRA accepts that if the home is used on a continuous basis for the enterprise's business, and it is clear from the circumstances that the enterprise required the individual to work from that location – the home can be treated as being at the disposal of the enterprise.
In practice, the NRA treats the following indicators as pointing towards PE formation through a home office:
The NRA has specifically flagged as a higher-risk scenario the case where the individual working from home in Bulgaria is also the sole director of the foreign enterprise – where a company's manager or key employee runs the business from their home abroad, making key decisions, meeting with clients, concluding contracts and performing services, so that the home effectively functions as the main place of business of the enterprise and is at its disposal.
In short, the NRA's settled position is that a home office in Bulgaria can constitute a PE of a foreign enterprise, and the decisive question in every case is whether the home functions as a fixed place of business of the enterprise through which substantive, revenue-generating activity is conducted on a regular basis. Where a PE is found to exist, the foreign company becomes subject to registration, tax and filing obligations in Bulgaria.
The 2025 OECD update introduces changes to the Commentary on Article 5 specifically intended to clarify when an individual's home used for cross-border remote work can constitute a "place of business" of the enterprise and therefore give rise to a fixed place of business PE.
The update has the stated aim of reflecting modern working arrangements and providing additional certainty on when a PE will, and will not, be created. It deletes the prior Commentary paragraphs that discussed the home office "at the disposal of" the enterprise. That text is replaced by a more detailed new framework entitled "Cross-Border Working from a Home or Other Relevant Place". It introduces a structured two-stage analysis centered on a working time threshold and a "commercial reason" test.
The key elements of the new framework are:
The 2025 OECD amendments represent a meaningful shift towards a more structured framework that provides clearer and more predictable guidance.
For Bulgarian practice, the significance of the new Commentary is considerable. The NRA applies the OECD Commentary as a tool for interpreting Bulgaria's DTTs. As the Commentary is updated, the NRA's analysis in individual cases can be expected to evolve accordingly.
In practice we believe that the new framework is likely to have the following effects:
It is worth noting that not all OECD member states have accepted every element of the new framework. Several countries have recorded reservations or alternative positions on the application of the 50% threshold and the "commercial reason" concept. Bulgaria has not recorded a specific reservation on these new paragraphs in the materials reviewed. In the absence of a specific Bulgarian reservation, the new framework may be expected to influence NRA practice, although its application remains to be tested.
If the facts point towards a Bulgarian PE, the practical question becomes not only how to manage the tax exposure, but also how to structure the presence properly. From a business perspective, Bulgaria remains an attractive jurisdiction: the country applies a flat 10% corporate income tax rate and a flat 10% personal income tax rate, while dividend distributions are generally subject to a low final withholding tax. This makes the Bulgarian tax system comparatively simple and competitive within the EU, provided the structure is set up and maintained in a compliant manner.
Good documentation will be important in either direction. Companies should consider maintaining clear remote-work policies, records of working time and place of work, evidence of where management decisions are made, and a contemporaneous assessment of the relevant DTT position. These documents can be helpful both where the conclusion is that no PE arises and where the company decides to register a Bulgarian taxable presence.
The risk of forming a PE through a home office in Bulgaria is real, recognized by the NRA, and is now being more precisely defined at the international level. Foreign companies that have been operating with individuals working from Bulgaria on an informal or unreviewed basis may find that their arrangements come under closer scrutiny by the NRA.
Foreign companies with individuals working from Bulgaria should review their arrangements proactively rather than treating remote work as a purely HR or operational issue. In practice, the analysis should focus on several key questions: how much working time is spent in Bulgaria; whether the individual performs core revenue-generating functions or only auxiliary tasks; whether the individual has authority to negotiate, conclude contracts or make key management decisions; whether there is a commercial reason for the work to be performed from Bulgaria and whether the applicable DTT provides a narrower or more specific PE definition.
The above is a general overview for informational purposes only and does not constitute legal or tax advice. Specific situations require individual analysis.
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