Tax and BG Property Law Info

Tax Guide

General Information about Taxes in Bulgaria

Bulgaria is a politically stable country, and the introduction of a currency board in 1997 stabilised the country's economy. However, as is the case elsewhere in Central and Eastern Europe, legislation, including that governing real estate, is volatile and subject to frequent change. A foreign investor can invest in properties in Bulgaria either directly or through a local entity. Only Bulgarian-resident individuals and entities can acquire title to land, while non-residents may acquire only buildings and limited rights (e.g., leasehold and construction rights) to land. In some limited cases, acquisition of immovable property by non-residents requires prior permission of the Ministry of Finance. Foreign investors are guaranteed full repatriation of profits resulting from an investment in Bulgaria . The transfer abroad can be made only after the bank effecting the transfer is presented a certificate proving payment of all Bulgarian taxes due.

Investing through a local entity versus direct investment

As indicated above, a foreign investor can invest in properties in Bulgaria either directly or through a local entity. In the case of a direct investment, the tax treatment of the foreign investors depends on whether or not their activities constitute a permanent establishment. The definition of a permanent establishment under Bulgarian law is very broad: the mere fact that a foreign company owns and rents out property in Bulgaria (except where such activity is carried out through an independent agent) may create a permanent establishment under domestic law. The various tax treaties entered into by Bulgaria usually contain a narrower definition of permanent establishment. If the activities of a foreign person owning real property in Bulgaria do not constitute a permanent establishment, the person will be liable for only 10% withholding tax on the rentals and capital gains, unless an even lower rate is applied under a double tax treaty or in exceptions such as laid out in the next section.

Capital Gains Tax

In principle for foreign persons (who do not reside in Bulgaria more than 183 days within one year) capital gains tax is 10 % of the profit (the balance between the declared purchase price and the declared sale price, minus expenses recognized by the law that reduce the taxable profit) but there will be no capital gains tax, if the following conditions are met:-

* 1. During the calendar year the person has sold only one property in Bulgaria (i.e. for more than one property there will be capital gains tax);

* 2. During the calendar year the person has sold up to 2 properties but more than 5 years have passed since the person has acquired the estates in question;

* 3. For tax purposes the person is considered resident of a member state of EU or another state from the European Economic Area, i.e. the tax relief is only for “European” citizens.

Basis of Taxation

The taxation of a local entity or a foreign entity which constitutes a permanent establishment is as follows.

Rental Income

The basis of the taxable income of a company, investing in Bulgarian real property is the gross income derived from the property less tax-deductible, property-related expenses and depreciation. Such expenses include repairs, maintenance, renovation and similar costs and interest on loans used for the acquisition of the property. A Municipal Tax at a rate of 10% of profits is due. This is then deductible in calculating taxable profits which are subject to a corporate tax rate of 10%.

Depreciation

Land itself is not depreciable, although any immovable property affixed thereto is, provided that it is used for the business activities of the company and is booked as a fixed asset. Depreciation for tax purposes is at a rate of 4% per annum, and is usually calculated using the straight-line method. Real estate acquired for purpose of re-selling it is considered as "investment property". As such, it is non-depreciable and is subject to annual revaluation to the market value. In practice, it is often unclear in which situations a property should be treated as an "investment property" rather than as a fixed asset.

Loss carry-forward

Tax losses can be carried forward for a five-year period. Losses cannot be offset against profits from previous years.

Transfer taxes

Apart from corporate tax, no other direct taxes are levied on the transfer of real property. The transfer is, however, subject to notary and municipal fees. The notary fees are paid on the higher of the market price or the book value of the property at varying rates, with the maximum being BGN 3, 500. In addition, 2% of the market value of the property is paid to the municipality in which the real property is situated.

Local taxes and rates

The owner of a building or a plot is obliged to pay a real property tax. Where a building is built on a State or municipal plot, the value of the plot will also be included in the tax base. The tax is equal to 0.15% of the book value of the property. Arable land is exempt from local taxes. In addition to the real property tax, owners also pay waste-collection fees.

Value Added Tax

Transactions with land and lease of property for residential purposes are exempt from.

Value Added Tax (VAT)

All other real estate transactions are subject to VAT at the uniform rate of 20%. The buyer/lessee is entitled to a VAT refund, provided that it is registered for VAT purposes.

Financing the property

Debt

Under currency control regulations, a registration with the Bulgarian national Bank is required for loans granted by non-residents to Bulgarian entities. Where the debt financing exceeds the equity financing, deductibility of interest is subject to limitation, which is determined by a particular formula. If the interest costs exceed the allowable limit, the excess is non-deductible. The interest costs not deducted in a given year can be deducted in the subsequent tax period. Interest paid to a foreign lender is subject to a withholding tax of 15%, unless a lower rate is available under a double tax treaty. Upon receipt of a loan denominated in a foreign currency, a local company must re-value its foreign currency liability monthly. The positive or negative differences are accounted for as current financial income or expenses. No additional evaluation is made at the end of the financial year or upon repayment of the loan.

Equity

An equity contribution can be either in cash or in kind. Real property, limited property rights, etc. can be subject to in kind contributions after a special evaluation is performed.

• In Bulgaria income of any individual is subject to a progressive tax. As at 2006, an individual pays a progressive tax of 10% - 24%.
• Exemptions are granted to taxpayers with specific types of income.
• The standard rate of tax for a Bulgarian corporate tax in in 2006 is 15%.

Income Tax for an Individual

• An individual in Bulgaria is liable for tax on his income as an employee as well as on income as a self-employed person. In the case of an individual who answers the test of a "permanent resident" of Bulgaria, tax will be calculated both on his income earned in Bulgaria and overseas. A foreign resident who is employed in Bulgaria pays tax only on his income in Bulgaria.
• To be considered a Bulgarian resident, the requirements must be met of residency in Bulgaria of at least 183 days in any calendar year, and occasionally also if residency is less than 183 days, if the individual has a home in Bulgaria that is his main residence, he will be considered a Bulgarian resident.
• An employer is obligated to deduct the income tax payable as well as national insurance, immediately each month from a salary paid to an employee.
• Certain payments are deducted from taxable income as detailed below.

TYPES OF CORPORATIONS

In Bulgaria, the following are accepted forms of incorporation:

• A limited liability company (with the suffix OOD) - At least 1 shareholder or more is required to set up the company. The shareholders may be individuals or companies. - The minimum share capital is BGL 5,000, with the minimum nominal value of BGL 10 a share. - At least 70% of the capital must be paid up before registration. - The owners of the company are liable only for the amount of capital invested. - An annual shareholders' meeting must be convened at least once a year. - A director must be appointed for the company.
• A liability company with a single shareholder (with the suffix EOOD) - This is an OOD company owned by one individual, who may be a foreign resident. - The single shareholder may serve also as a director of the company.
• A consolidated company (with the suffix AD) - At least 1 shareholder or more is required to set up the company. - The minimum share value is BGL 1. - The company must have a minimum registered capital of BGL 50,000. For banks, the minimum capital requirements are BGL 10 million. - At least 25% of the registered capital must be paid up before registration. - The company is managed by a board of management, or at two levels by 'a supervisory board' and a 'board of management'.
• A consolidated company with a single shareholder (with the suffix EAD) - The company is owned and controlled by a single shareholder. - It is compulsory to file an annual balance sheet with the tax authorities.

BULGARIAN ANNUAL INFLATION RATES Year % of change 1998 18.7 1999 2.6 2000 10.3 2001 7.4 2002 5.8 2003 2.3 2004 6.1

Bulgarian Property Law Info

Bulgaria has one of the most liberal foreign investment laws in the region regarding Bulgarian real estate, as well as the foreign investors. According to the Bulgarian Constitution and legislation foreign persons and companies can invest in real estate in Bulgaria either personally or through a local legal entity. Generally speaking, foreigners as persons can acquire only buildings but not land. Only Bulgarian citizens and legal persons (including such with foreign owner) can obtain the ownership of Bulgarian land.

Therefore, the most popular and preferred by non-residents ways to become the real estate owners are:

1. As far as houses, villas, flats and limited ownership rights (the right of use, the right to build a house, etc.) are concerned, you can directly purchase them as a person.
2. When talking about Bulgaria real estate with land, you set up a company that will be the owner of the property. Setting up a company in Bulgaria is very easy. All you need is a good solicitor or barrister at law.

Of course, there are other ways to do it, like:

1. Establishing a joint venture with existing local companies;
2. Setting up a new venture;
3. Acquiring a company through privatisation;
4. Making a portfolio investment;

Foreign organizations have the right to open bank accounts denominated in a Bulgarian or foreign currency. There is also no limit to the company stake they possess. Moreover, there is a special regime of respect towards the foreign investors on the part of the Bulgarian legislative system, which is a gesture of tolerance to those, who are interested in Bulgaria and are willing to benefit from its future. Last 2 Bulgarian governments are doing their best to attract foreign investors to our economy, inclusive such that want to buy Bulgaria real estate.

We are here to help and organize the whole process of acquisition for you from the start to the very end. The service will be undertaken by a Bulgarian lawyer, expert in Bulgaria real estate and specialists who will provide you with a professional help in the field you need, including:

1. Registrations of mixed and foreign companies;
2. The best relation between price and quality of real estate achieved by professional negotiations;
3. Property management and real estate maintenance;
4. Travel arrangements when arranging viewings of Bulgaria real estate;
5. Own cars for visits to real estates in the country;
6. Advice on any topic that intrigues your attention

IMPORTANT INFORMATION TO CONSIDER WHEN BUYING PROPERTY IN BULGARIA

* The usual term for the old owners of the property to move out of it after completion of the sale is one month. This could be negotiated if the buyers require a shorter term. For this purpose, they should ask the assistance of Bulgarian Properties Ltd. in due term and not expect the property to be empty right after signing of the final contarct.

* All foreign buyers purchasing real estate property must be aware that in Bulgaria there are such terms as "tax estimation price" and "purchase price". The "tax estimation price" is for the purposes of real estate taxation and is much lower than the actual selling (purchase) price. Most of the Bulgarian propety owners (vendors) wish that the "tax estimation price" is written in the title deed, and not the selling (asking) price which the buyers are paying, so due to this practice there might be discrepancies between the price you are paying and the price written in the title deed. This is because of various reasons and Bulgarian Properties Ltd. can not be responisble for it. If the respected property buyer wishes that the purchasing price is written in the property title deed they must notify us in advance and we will negotiate on this with the vendor of the property.

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