The dispute concerned the valuation of the Kameniza trademark (Bulgarian: Каменица), acquired by the Bulgarian company Kameniza AD from its Dutch parent company, S.N. B.V., for EUR 40.1 million in 2014 and a later installment payments under the agreement in 2017.
The taxation of the initial payment for the trademark in 2014 was addressed in an earlier judgment of January 2025, while the current case focused on the 2017 installment payments under the same agreement.
As with the initial payment, the tax authority treated the amounts exceeding the determined arm’s length value of the trademark (BGN 15.1 million plus interest) as hidden profits distributed to the Dutch parent company, and imposed a 5% withholding tax on the deemed dividends.
However, on appeal, the Administrative Court had ruled in favour of Kameniza AD, finding that the authorities had incorrectly relied on a 2009 acquisition price as the basis for the valuation and guidance provided in the 2017 OECD Guidelines, which were not formally applicable to the 2014 deal.
The tax authorities then filed an appeal with the Supreme Administrative Court.
Judgment
The Supreme Administrative Court overturned the Administrative Court’s ruling. It held that the tax authorities were entitled to use the 2009 acquisition price and functional analysis as benchmarks and that the OECD guidance on DEMPE functions was a legitimate interpretative tool, not the retroactive application of law.
The court confirmed that the 2014 transfer price was above market value and that the 2017 payments represented hidden profit distributions to the parent company. It also confirmed that withholding tax on dividends had been lawfully assessed.
Excerpts in English
“The dispute concerns the determination of the market price of the Kameniza trademark at the time of its sale between the related parties Kameniza AD and S. N. B.V. The factual findings of the revenue authorities, as set out in their previous RA, cannot have binding evidentiary force, but the act is indirect evidence, considered as a whole, of the disputed facts and circumstances, and therefore should not be ignored. The evidence has been duly recorded in protocols in accordance with the Tax and Social Security Procedure Code, collected in the course of previous control proceedings against KAMENITZA AD. Next, in order to assess the extent to which the agreement for the purchase of the Kameniza trademark dated 10 September 2014 was concluded under conditions corresponding to the purpose of Article 4 of Regulation No. H-9 of 14 August 2006 on the order and methods of applying the methods for determining market prices, a comparative analysis of the methodology applied by Ernst & Young LLP was carried out during the audit, taking into account the data provided by the liable person. In accordance with the guidelines contained in the report “Guidelines for Transfer Pricing of Financial Transactions” (Section F. 1.), the risk-free rate of return was determined to be approximately 2.576%.
The above served as a legal basis for the auditing authorities to accept that with the sale price of the Kameniza trademark S. NL would achieve an average annual rate of return of approximately 10.32%, which is much higher than the risk-free rate of return to which it is entitled in accordance with the functions it performs. A reasonable adjustment was made to the sale price of the trademark so that the average annual return of the Dutch company would correspond to the determined risk-free rate of return of approximately 2.576%. The amounts paid by KAMENITZA AD for acquiring ownership of the Kameniza trademark exceed the sum of the market price of BGN 15,112,870.52 determined as a result of the audit and the amount of interest due for deferred payment of the trademark of 4.5%, which corresponds to the discount factor used by Kameniza AD in the accounting of the liability under the Agreement of 10 September 2014 for the purchase of the Kameniza trademark “Kameniza” for the amount of EUR 40,100,000.00, but applied to the market price determined during the audit, it was lawfully assessed by the revenue authorities as a hidden distribution of profit within the meaning of §1, item 5, letter “a” of the Additional Provisions of the Corporate Income Tax Act. In connection with the purchase of the trademark from KAMENITZA AD, transfers were made on 15 September 2017 in the amount of EUR 2,673,333.33 (BGN 5,228,585.53) and on 13 November 2017 in the amount of EUR 9,000,000.00 (BGN 17,602,470.00) were made in favor of M. K. N. B.V. (formerly known as S. N. B.V.). The revenue authorities have lawfully established in this regard that part of the amount paid on 15.09.2017 in the amount of BGN 4,808,090.58 and the entire amount of the payment made on 13.11.2017 exceeded the market price determined by the authorities between the parties to the transaction.”
“The court’s reasoning that the auditing authorities should have made a comparative analysis between the transactions in 2012 and 2014, rather than examining the 2009 transaction, is unfounded. With regard to the 2012 valuation, insofar as it also lacks an analysis of the functions performed by the parties to the transaction and their specific contribution to the formation of the value of the intangible asset, and this, according to the above, is essential for determining the market price of the Kamenica trademark when Kameniza AD is a party to the transaction, it was correctly not accepted as a comparable uncontrolled transaction. In this regard, the revenue authorities have reasonably based their determination of the market price of the trademark in the 2014 transaction on the price at which it was acquired in 2009 from the seller. In view of the above, the revenue authorities lawfully charged the company tax on dividends and liquidation shares of legal entities for the period from July 1, 2017, to December 31, 2017, in the total amount of BGN 1,120,528.03 and the corresponding interest in the amount of BGN 637,396.09.
The decision of the administrative court in the appealed part is incorrect and should be revoked, after which the appeal against the RA in the same part should be dismissed.”
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