Economic substance: avoiding the letterbox company

What is economic substance?

Economic substance refers to the tangible reality of a company: the fact that it exists not only on paper at the Commercial Register, but also in the physical world.

A registered Bulgarian company — identified by its EIK number — is just a legal shell as long as no activity, no resources and no presence are attached to it. Substance is precisely the set of elements that prove something is happening behind the EOOD.

The opposite of substance is the infamous "letterbox company": a rented registered address, a registration, and nothing else. No office in use, no reachable contact, no living bookkeeping.

This configuration, long tolerated, is now scrutinised closely — by tax authorities (who look at where the company is actually managed) as much as by banks (who check the reality of the activity at the KYC stage).

Forming a Bulgarian company, for its part, remains perfectly legal and advantageous — see our pillar guide forming a Bulgarian company remotely — on the sole condition that it is backed by genuine substance.

The EOOD (single shareholder) and the OOD (several shareholders) are the classic forms. But for a 100% remote formation, with no capital deposit or prior bank account, the DPK/EDPK is often the simplest choice — see EOOD, OOD or DPK. Whatever form you choose, the substance challenge remains the same.

Why is substance decisive (tax + bank)?

Substance is not a compliance detail: it is the pillar that holds your whole set-up together. It comes into play on two fronts that can, on their own, derail a poorly prepared project.

1. The tax front

The tax authority of your country of residence may seek to attach the profits of your Bulgarian company to itself. Three notions come up systematically:

• Tax residence — where is the company actually managed?
• The permanent establishment (a notion governed by international tax treaties, the OECD model) — is the company in fact run from abroad?
• Abuse of law — does the set-up have a purely tax-driven purpose?

Faced with these three questions, substance is your best defence. And the stakes are high: Bulgaria offers an overall tax burden among the lowest in the EU — 10% corporate tax (чл. 20 ЗКПО, lex.bg) then between 0 and 5% on dividends (0% to an EU/EEA parent company, with no threshold or holding period, чл. 194, ал. 3, т. 3 ЗКПО; 5% paid to an individual).

That comes to around 10 to 14.5% once profits are distributed, depending on the dividend rate — whereas Hungary advertises a 9% headline corporate tax but exceeds 20% once dividends are added (see our Bulgaria vs Estonia, Dubai and France comparison).

To this is added a point often decisive for an e-commerce seller who sells on their brand or their seller account: the taxation of the capital gain on disposal. But it follows three cases, and the "0%" is never unconditional — see the box below. In any case, these rates are lasting advantages only if the set-up is genuine and documented — low taxation is worth nothing if the company is not genuinely operable.

The gap with a set-up that stays in France is structural, not anecdotal. On a comparable basis, the expatriate established in Bulgaria keeps about +63% more net over five years, where an equivalent activity taxed in France pays nearly 3.1× more tax. The table below sums up the rate gaps that produce this effect:

* Capital gain on disposal: 10% under domestic law (unlisted shares); 0% in Bulgaria for a non-resident transferor, but taxable in your country of residence — detail in the box above.

These percentages are structural and defensible. Any absolute amount in euros, however, depends on your actual turnover and profitability: the net gap presented here rests on a scenario of sustained returns — an upper bound, not a promise.

The place of effective management: the 4 conditions

At the heart of the tax front lies a precise notion: the place of effective management. This is the real legal test for a French tax resident — and it applies just as much to a Belgian or Swiss resident — who manages a Bulgarian company remotely.

The question the tax authority asks is simple: from where is the company actually run? If every decision is taken from your living room in France, the tax authority may consider that effective management is located there, and attach the profits to it.

The tax law firm Valoris Avocats, with whom Fenchell works, sets out four concrete conditions for anchoring that effective management in Bulgaria:

This is where the first condition meets the very subject of this guide. The genuine office on the ground and the tangible local presence are precisely what Fenchell provides: offices and registered address in Plovdiv, a mandated local agent, a Bulgarian mobile line and a point of contact on the ground.

It is this substance that makes the place of effective management defensible before the tax authorities — the rest depending on your life choices and your declarative rigour.

2. The banking front (KYC)

Before opening an account, every bank or fintech applies a KYC (Know Your Customer) procedure. The analyst checks the address, the nature of the activity, the consistency between the company's country, the director's and that of the flows.

An empty shell sends all the wrong signals and regularly ends up refused — or closed a few months after opening. Conversely, a company with an address in use, a local agent and bookkeeping in place clears KYC far more smoothly. It is a prerequisite we detail in opening a Bulgarian business bank account.

What constitutes genuine substance?

Substance is assessed through a body of evidence: no single element is enough on its own, it is their combination that carries weight. Here are the four concrete pillars, and the difference with an empty shell.

A generic registration ticks the first line; the Eurotrade pack ticks every box — verifiable, line by line.

• A genuine physical address. Not just a plate on a door, but an address in use, able to receive official mail, notifications from the Bulgarian tax authority (NRA) and bank checks.
• A local agent. A person or entity mandated in Bulgaria, who handles liaison with the authorities, the BULSTAT register and the banks, and can produce an up-to-date Aktualno Sastoyanie (certificate of good standing).
• A Bulgarian mobile line. An active Bulgarian (business) mobile number anchors the company in the country. It is a simple but powerful marker during KYC and any audit.
• Bookkeeping kept locally. Up-to-date entries, VAT and corporate tax returns filed on time: this is the living proof that the company genuinely operates.
• The remote operability infrastructure. This is what turns substance into a company that is genuinely operable: a dedicated web interface to read live, from any device, your SMS (OTP / 2FA codes from banks and platforms) received on your Bulgarian mobile line, call forwarding, mail collection and scanning, registration of the point of contact (POC) required for AML/MAMLA compliance, help assembling the files for opening bank and fintech accounts remotely (you remain the applicant), and a dedicated static IP with a stable business connection. Without these elements, you own a registered shell — not a company you can run from abroad.
• A formally appointed manager. The management contract (договор за възлагане на управлението, чл. 141, ал. 7 ТЗ) that binds the company to its manager, and the entry of that manager in the Commercial Register, formalise genuine management — a substance marker the authorities can verify.

For e-commerce sellers, substance often comes with operational registrations — an EORI number for import/export, the OSS / IOSS one-stop shop — which further reinforce the reality of the activity.

What are the risks of an empty shell?

Setting up a Bulgarian company without substance is building on sand. The consequences are not theoretical:

• Tax re-characterisation. Your country's tax authority may consider that the company is in fact run from your home, and tax its profits there — wiping out the entire intended advantage, with surcharges and interest on top.
• Account refusal or closure. Banks detect empty shells and respond with a KYC refusal or an abrupt closure, which can paralyse an activity overnight.
• Loss of the exemption benefit. The Bulgarian parent-subsidiary exemption on dividends paid to an EU/EEA parent company (0%, with no threshold or holding period, чл. 194, ал. 3, т. 3 ЗКПО) presupposes genuine and substantial companies; an artificial structure may be deprived of it and fall back on the ordinary withholding (up to 5%) — see dividends in Bulgaria (between 0 and 5%).
• Reputational damage. Marketplaces, partners and payment providers tighten their own checks. A structure deemed fictitious closes commercial doors.

The lesson is clear: the saving from doing without substance is trifling against the cost of a re-characterisation or a blocked account.

How does Fenchell secure substance?

This is precisely where the difference plays out between a mere "form-filler" and a genuine firm. Fenchell is physically present in Plovdiv (bul. Maritsa 95), since 2018, with nearly 1,000 companies formed (90% Bulgarian, 10% French and American), Amazon EU Agency Partner status and an Ekomi rating of 4.8/5.

Your EOOD rests not on an anonymous address, but on a verifiable infrastructure — one that strengthens your bank application files (the opening decision always remaining the institution's) and supports an 80% Amazon account recovery rate for clients who follow our instructions to the letter.

Concretely, the Eurotrade pack (complete formation from €890 excl. VAT) includes the EIK, VAT, help with opening bank accounts and ongoing support, then the registered address and local agent from €29/month excl. VAT and bookkeeping kept locally from €179/month excl. VAT.

It is this continuity — an address in use, a reachable contact, a Bulgarian mobile line, up-to-date entries — that makes your company a genuine presence, and not a letterbox. To place the whole journey in context, see the pillar guide forming a Bulgarian company remotely.

The real difference lies there: a generic incorporation — whatever the provider or the country — covers only one line of the equation, the legal registration. It does not anticipate the dedicated web interface to read your SMS and OTP codes live, call forwarding, mail scanning, registration of the AML point of contact, remote account opening or the provision of a dedicated static IP.

The Fenchell offer is precisely the opposite: an integrated, inseparable system. The file itself — a set of more than 20 bilingual Bulgarian/English documents (more than 30 for multi-shareholder companies) — brings together, in particular:

• the articles of association;
• the official registration certificate and its sworn translation;
• the 8 notarised powers of attorney;
• the FID, the QES key, and many others.

This file is designed by our qualified legal team — our lawyers admitted to the Plovdiv Bar — specifically for remote management, drawing on years of experience and thousands of real client cases.

Operability is not bolted on afterwards: it is built in from the outset, within the file. It is this infrastructure, built as a single whole, that creates the genuine economic substance — the kind that makes the tax advantage defensible and the company truly workable, wherever you are.

To make this gap immediately legible, the table below places side by side what it really takes to operate a Bulgarian company remotely, what a generic incorporation covers, and what the Eurotrade pack includes.

Where the prose above describes the building blocks one by one, this recap makes the case scannable: a generic registration stops at the first line: the registered company. All the rest of the operability, it does not cover.

A generic registration ticks the first line; the Eurotrade pack ticks every box. That is exactly where the difference plays out between a registered shell and a company genuinely operable remotely.

General information current as of 8 June 2026, not constituting personalised tax, legal or accounting advice. Substance rules, tax residence and the notion of a permanent establishment are assessed case by case according to your country of residence: check your situation with a qualified adviser. Fenchell Capital OOD — Bulgarian firm based in Plovdiv (EIK 207945095).