The transactions under review comprised two distinct sets of dealings. The first set concerned wholesale fuel supply transactions between Lukoil Neftohim Burgas (producer) and Lukoil Bulgaria EOOD (distributor) in 2017 and 2018. The second set of transactions involved an intra-group loan of USD 150 million, which was originally agreed on 14 March 2008 between Lukoil Bulgaria EOOD and LUKOIL Europe Holdings B.V. The lender was later replaced by LUKINTER Finance B.V. through a notice of assignment dated 25 November 2014.
The tax authorities took the position that the wholesale fuel prices charged to Lukoil Bulgaria were above market level. This conclusion was derived from an analysis based on operating profit, measured through the EBIT indicator. This analysis showed that Lukoil Bulgaria’s operating margin for wholesale and retail activities in 2017 and 2018 was below the average margin of a comparable group of fuel traders. As the tax authorities accepted that Lukoil Bulgaria’s sales prices to customers were market-based and that its operating expenses were comparable to those in the sample group, they concluded that the lower operating result must have been caused by inflated input prices from Lukoil Neftohim Burgas. Regarding the loan, the tax authorities argued that the interest rate was not market-based because the loan should be considered secured, given the existence of guarantees in other financing arrangements entered into by Lukoil Bulgaria. Therefore, they treated the interest as giving rise to transfer pricing adjustments and hidden profit distribution.
Lukoil Bulgaria challenged the assessment, arguing that EBIT is an indirect indicator and cannot establish non-market pricing of inputs by itself. The company emphasised that there was no dispute regarding the market nature of its output prices, and that the tax authorities had themselves accepted the comparability of its operating expenses. According to Lukoil Bulgaria, the lower operating profit could be explained by two cost elements that were either absent or significantly lower for the comparable traders: the inventory effect and disproportionately high depreciation. Expert evidence showed that, if depreciation were adjusted to the average level of comparable traders, Lukoil Bulgaria’s operating profit would fall within, and in some periods exceed, the market range. The taxpayer also relied on a gross profit analysis which excluded operating expenses and directly compared input and output prices. This analysis demonstrated gross margins at or above the market average. With regard to the loan, Lukoil Bulgaria asserted that it was unsecured, as evidenced by the loan agreement and the absence of collateral or guarantee costs. They also argued that comparisons with secured third-party bank loans were irrelevant. The expert evidence supported the conclusion that the interest rate was market-based for an unsecured loan.
Judgment
The Supreme Administrative Court admitted certified copies of the loan agreement and the notice of assignment into evidence, as well as a reference to international market prices for gasoline and diesel fuel based on Platts quotations for the period from 1 January 2017 to 31 December 2018. After hearing from the parties involved and the prosecutor, the court closed the oral proceedings and announced that it would deliver its decision within the statutory time limit.
Bulgaria 8514-2025 ENG
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