Permanent establishment risk and VAT treatment of cross-border services

Under the OECD Model and the Bulgaria-Sweden treaty, a fixed place of business PE requires a place of business (the rented Sofia office qualifies), at a fixed location, through which the business is wholly or partly carried on. A 60-day presence is short, but duration is not decisive where the place is fixed and activity is not purely preparatory or auxiliary. Implementation services on client premises are core, not auxiliary, activity.

More decisive is the dependent agent test. The two engineers have authority to negotiate and sign implementation contracts habitually in Bulgaria. Under Article 5(5) of the OECD Model, a person acting on behalf of the enterprise and habitually concluding contracts in its name creates a PE unless that person is an independent agent acting in the ordinary course of business. Employees are not independent agents. The authority to conclude contracts is therefore the strongest PE indicator here.

Consequences if a PE exists:

• Bulgaria may tax the profits attributable to the PE under Article 7, applying the authorised OECD approach (functional and risk analysis, capital attribution).
• The PE must register for Bulgarian corporate tax and file returns; the Swedish company remains non-resident but taxable on PE profits at the 10% Bulgarian rate.
• Transfer pricing documentation is required for transactions between the PE and the head office.
• The PE may also create Bulgarian VAT registration obligations and payroll/social security exposure for the seconded engineers.

The conclusion should be that PE risk is high, driven by contract-signing authority rather than by the 60-day count alone. Mitigation: remove signing authority, route contracts through the Swedish head office, and document the service nature.

VAT. Electronically supplied services (cloud software subscriptions) made by a non-established taxable person to Bulgarian business customers are B2B supplies. Under the place-of-supply rules for services, B2B services are supplied where the customer is established, so the place of supply is Bulgaria. The Bulgarian customer accounts for VAT under the reverse charge; Nordic does not charge Bulgarian VAT and does not need to register if all supplies are B2B reverse-charge supplies. The customers' valid VAT numbers must be verified and retained as evidence.

If any customers were non-taxable persons (B2C), the place of supply for electronically supplied services would be where the customer is established, and Nordic would need to register under the non-Union OSS scheme (or a Bulgarian registration) and charge Bulgarian VAT at 20%. The facts say customers are businesses with VAT numbers, so reverse charge applies; but the 340-customer base should be screened for any without valid numbers.

Withholding tax. The subscription fee is a payment for the use of, or right to use, software, which is generally royalty income under the treaty. If the payments are made by Bulgarian customers to a Swedish company, Bulgaria may tax the royalty at source under the treaty's royalty article, typically at a reduced rate (commonly 5% or 10% depending on the treaty), and the Bulgarian payer must withhold and remit. The CFO's assumption that no Bulgarian tax arises is therefore unsafe: even where VAT is reverse-charged, the withholding tax on royalties can apply. Check the exact treaty article and the Bulgarian domestic rule that treats software licence payments as royalties. If the payment is characterised as a business profit rather than a royalty, no withholding applies absent a PE; but the treaty characterisation must be documented.

If a PE exists, the BGN 1,800,000 is not automatically taxable in full in Bulgaria; only the profit attributable to the PE is. Apply the authorised OECD approach: identify the functions performed in Bulgaria (implementation, contract negotiation, client relationship), the assets used and risks assumed, then attribute an arm's-length profit. If implementation is a low-risk service function, a cost-plus or transactional net margin approach may attribute a modest margin to the PE, not the whole subscription revenue.

Compliance consequences:

1. Register the PE with the Bulgarian revenue authority and obtain a tax identification number.
2. File an annual corporate income tax return for the PE, with transfer pricing documentation supporting the attribution.
3. Consider whether the PE must register for VAT separately, and whether intra-entity charges between head office and PE are within scope.
4. Assess payroll and social security for the two engineers working 60 days in Bulgaria; short-term secondment reliefs under the EU social security coordination rules and the treaty's employment income article should be checked.
5. Consider penalties and interest for late registration; voluntary disclosure before audit may reduce penalties.

Recommendation: do not report the full BGN 1,800,000 as Bulgarian taxable income. Instead, quantify the PE-attributable profit, register, and file. If the PE risk is rejected on a properly documented functional analysis (no signing authority, preparatory activity only), obtain a reasoned position paper and consider an advance tax ruling or mutual agreement procedure. The 60-day presence alone is unlikely to create a PE, but the contract-signing authority is decisive and must be removed prospectively.