Holding Structures in Preferential Tax Jurisdictions: When Do They Serve a Genuine Business Purpose?

The practical issue for a business is whether an international holding company performs a genuine commercial function and whether its legal, tax and operational arrangements are consistent with the actual activities of the group. Where adequate commercial justification is absent, potential tax advantages may be affected by controlled foreign company rules, anti-abuse provisions, beneficial ownership requirements, transfer pricing rules, transparency obligations and risk-based banking due diligence. 

For the purposes of this article, the term "preferential tax jurisdiction" is used descriptively for a jurisdiction offering low or special tax treatment. It is not synonymous with a jurisdiction included on the EU list of non-cooperative jurisdictions for tax purposes, nor does the use of an entity in such a jurisdiction imply unlawful conduct. The EU list is a separate instrument that is reviewed periodically, with the latest revision before the date of this publication having taken place on 17 February 2026. 

When Does an International Holding Company Have a Practical Function? 

An international holding company has the clearest commercial rationale where it consolidates assets and subsidiaries across several jurisdictions, facilitates investment or provides a common ownership platform for a multinational group. In such circumstances, the holding company may centralise ownership, simplify capital arrangements and provide a suitable framework for financing, a future sale or a public offering. 

A holding structure may also be relevant where investors require familiar corporate instruments, different classes of shares, detailed shareholders' agreements or established dispute resolution mechanisms. These features may provide corporate and transactional advantages, but they do not independently determine the tax treatment of the structure. 

The Cayman Islands and the British Virgin Islands continue to maintain legal forms and regulatory regimes used for international investment funds, including limited partnership and corporate fund structures. Use of such a vehicle does not automatically establish tax neutrality for investors. The tax consequences must be determined separately by reference to the particular fund, its investors and managers, their jurisdictions of tax residence and the applicable domestic and international rules. 

Why Is Formal Ownership of Intellectual Property Not Sufficient? 

Transferring a patent, trademark, software right or other intangible asset to an entity in a low-tax jurisdiction does not by itself determine where the economic return from that asset should be allocated. 

The OECD Transfer Pricing Guidelines require an analysis of the functions relating to the Development, Enhancement, Maintenance, Protection and Exploitation of the intangible, commonly referred to as DEMPE. The analysis also considers the relevant assets, financing and economically significant risks and identifies the entities that actually control those risks. 

There is no general requirement for a legal owner to perform every DEMPE function through its own employees. Particular activities may be outsourced to associated enterprises or third parties. Where the legal owner neither performs nor controls the relevant material functions and risks, however, legal title alone does not justify allocating all residual profit to that entity. Associated enterprises performing relevant functions must receive arm's length remuneration for their actual contribution. 

How Do Bulgarian CFC Rules Affect an International Holding Structure? 

Bulgarian controlled foreign company rules are contained in Articles 47c et seq. of the Corporate Income Tax Act. They are relevant where a Bulgarian taxpayer controls a foreign entity or permanent establishment and the statutory control and low-tax conditions are satisfied. The control test includes direct or indirect participation exceeding 50% of voting rights, capital or entitlement to profits, held by the taxpayer alone or together with associated enterprises, subject also to the separate taxation test. 

Where the CFC regime applies, Article 47d of the Bulgarian Corporate Income Tax Act requires an adjustment to the taxpayer's tax result by reference to the undistributed tax profit of the controlled foreign entity or the profit of the relevant foreign permanent establishment, determined under the statutory rules. The Bulgarian CFC regime should therefore not be described as applying only to specified categories of passive income. 

An important exception applies where the controlled foreign company carries on substantive economic activity supported by the personnel, equipment, assets and/or premises required for that activity. The Bulgarian taxpayer must demonstrate the relevant facts and circumstances. 

Accordingly, the location of the holding company and its nominal corporate tax rate are not sufficient to determine CFC exposure. Ownership and control, effective taxation, the activities of the foreign entity and evidence demonstrating those activities must all be assessed. 

Beneficial Ownership and Anti-Abuse Rules 

For cross-border payments, access to treaty relief or another preferential tax treatment may depend on whether the recipient is the beneficial owner of the relevant income and whether the arrangement constitutes an abuse. 

For the purposes of applying double tax treaties under Bulgarian law, the Tax and Social Security Procedure Code contains criteria for determining whether a foreign person is the beneficial owner of income. Relevant considerations include whether the recipient has the right to dispose of and use the income, bears all or a substantial part of the associated risk and does not operate as a conduit for persons that would not have qualified for the relevant treaty relief if they had received the income directly. 

The Court of Justice of the European Union's Danish cases confirm the significance of the prohibition of abuse in the application of EU tax directives and the need for a factual assessment of intermediary and conduit structures. In Case C-228/24 Nordcurrent, decided on 3 April 2025, the Court further clarified that an abuse assessment cannot be based mechanically only on the circumstances existing on the dates on which dividends are distributed and that classifying a subsidiary as a non-genuine arrangement is not, by itself, sufficient without establishing the required elements of abuse. 

The existence of an intermediate holding company therefore does not automatically result in denial of tax benefits. Equally, inserting an entity into an ownership chain does not by itself secure access to treaty or EU relief where the underlying factual and economic circumstances do not support the claimed treatment. 

When Can a Bulgarian or Other EU Holding Structure Be Appropriate? 

For groups whose principal operations and investments are located within the European Union, a structure involving Bulgaria or another EU Member State may reduce the need for an additional corporate layer outside the EU. The appropriate jurisdiction nevertheless depends on the location of subsidiaries and investors, applicable tax treaties, governance requirements and the actual role of the holding company. 

Council Directive 2011/96/EU, the Parent-Subsidiary Directive, is intended to eliminate specified forms of economic double taxation of profits distributed between qualifying companies in different Member States. Where its conditions are met, qualifying distributions are exempt from withholding tax in the subsidiary's Member State. The Member State of the parent company must provide relief from double taxation through the exemption or tax credit mechanism permitted by the Directive. The Directive also contains a general anti-abuse rule. 

Bulgaria's corporate income tax rate is 10%. Under Article 194(3)(3) of the Corporate Income Tax Act, withholding tax on dividends and liquidation proceeds does not apply where the recipient is a foreign legal entity that is tax resident in an EU Member State or another state party to the European Economic Area Agreement, except in cases of hidden profit distribution. 

For incoming dividends, Article 27 of the Corporate Income Tax Act generally excludes from the tax base accounting income resulting from dividends distributed by Bulgarian legal entities and by entities tax resident in an EU or EEA state. The Act provides specific exceptions, including hidden profit distributions and other expressly defined cases. 

These rules may be relevant when considering Bulgaria as a holding jurisdiction, but they do not remove the need to analyse the CFC regime, transfer pricing, applicable tax treaties, beneficial ownership and anti-abuse requirements. 

Tax Transparency, DAC6 and Banking Due Diligence 

A modern international holding structure operates in an environment of extensive tax and corporate transparency. The Common Reporting Standard (CRS) provides for automatic exchange between participating jurisdictions of specified financial account information. The consolidated 2025 standard also reflects updates to its scope and due diligence requirements. 

DAC6 should not be understood as requiring the automatic disclosure of every cross-border structure. Under Article 143ya of the Bulgarian Tax and Social Security Procedure Code, the reporting regime concerns cross-border tax arrangements that satisfy the statutory conditions and contain at least one of the prescribed hallmarks. Whether a reporting obligation arises must therefore be assessed by reference to the particular arrangement. 

The EU list of non-cooperative jurisdictions for tax purposes may also be relevant, but its consequences are not identical across all Member States. EU countries have agreed coordinated defensive approaches, while particular measures involving deductibility, CFC rules, withholding taxes or participation exemptions depend on domestic legislation. 

Banks and other regulated institutions apply risk-based customer due diligence. The jurisdiction in which an entity or beneficial owner is established or resident, the nature of the business, ownership structure and connections with particular countries may form part of that risk assessment. Incorporation in a preferential tax jurisdiction does not automatically prevent access to banking services, but a more complex structure may result in enhanced due diligence and additional documentation requirements. 

How Should a Business Assess the Need for an International Holding Company? 

The starting point should be the specific commercial purpose of the structure. An international holding company may be justified by the consolidation of assets across several jurisdictions, international investment, an investment fund structure, separation of particular risks or preparation for a corporate transaction. 

Once the commercial purpose has been established, the analysis should consider the jurisdictions of the operating companies and investors, ownership and control, tax residence, CFC rules, applicable tax treaties, withholding taxes, transfer pricing, governance and substantive activity requirements, and the regulatory and banking implications. 

Where the international corporate layer performs no function consistent with the group's actual operations and investment arrangements, a low nominal tax rate is not, by itself, a sufficient basis for a sustainable structure. Where there is a genuine business purpose, appropriate governance and consistency between contractual documentation and the parties' actual conduct, an international holding company may perform a distinct and commercially justified function. 

Legal Assistance with Holding and Investment Structures 

Vassilev & Chisuse Law Firm provides legal and tax assistance to entrepreneurs, investors and corporate groups in the design and review of holding and investment structures. The assistance may include reviews of existing international structures and legal representation in connection with cross-border tax audits. 

This material is provided for general information purposes only. It does not constitute individual legal, tax, financial or investment advice. The legal and tax consequences of a particular structure depend on the applicable domestic law, international treaties and the specific facts and circumstances.