Bulgaria is one of the lowest taxed countries in Europe. Due to this, as well as its beautiful nature, attractive real estate prices and favourable double taxation treaties with numerous countries (55), Bulgaria has become one of the most reputable zones for investments in the real estate industry.

General Information on Bulgarian Real Estate Law

According to the Bulgarian Constitution, foreign nationals and foreign legal entities may not directly acquire ownership rights on land. Any foreigner who inherits land in the country is obliged to transfer the ownership of the land to local natural or legal person within three years after the inheritance is effective. Foreigners, however, are permitted to acquire the ownership of buildings and premises within a building as well as limited property rights. Under limited property rights, the Bulgarian law understands the right of use (usus), the construction right (superficie) and the servitudes.

The above restrictions, however, do not apply to Bulgarian companies, irrespective of the percentage of the foreign participation in the company. Thus, foreign persons can acquire full land ownership rights, including ownership rights on agricultural land by setting up or joining a company incorporated under the Bulgarian legislation.

The amendments in the Constitution, adopted by the Parliament in February 2005, aiming to revise the basic law in the context of the country’s accession into the European Union, liberalise the restrictive regime for acquisition of land by foreigners. According to the amendments, foreign individuals and legal entities will be permitted to acquire and own land in three hypotheses:

• The citizens of the EU Member States - in compliance with the terms and conditions of the Accession Treaty which inter alia will provide for a seven-year suspension period;
• By virtue of a ratified international treaty;
• In case of ex lege inheritance. Citizens of the EU States will be exempted from the seven-year suspension period and will be entitled to acquire land immediately as of the country’s accession in January 2007 provided that they fall into any of the following two categories: if they reside continuously in Bulgaria or if they are self-employed persons having permanent residence in Bulgaria and carry out agricultural activity in the country.

Taxes and fees

According to the Local Taxes and Fees Act, the immovable property and the limited ownership rights acquired against payment are subject to taxation.

The tax has to be paid by the acquirer of the property. In case it is stipulated that the tax is due by the both parties, they are jointly responsible.

The tax for property acquisition is two per cent of the valuation of the transferred property. It is determined on the base of the higher value between the tax assessment and the negotiated sell price as declared in the draft notary deed or in the contract.

The proprietor must also pay a notary fee for immovable property acquisition according to the prescriptions of the Notary and the Notary Activity Act.The exact amount of the notary taxes is defined in Notary Taxes Tariff (article 8) as the table shows:

The Bulgarian tax regime related with real estate deals can be classified in two main categories:

Direct Taxation:

• Corporate income tax;
• Personal income tax;
• Withholding taxes.

Indirect Taxation:

• VAT

Corporate Income Tax

Under the Corporate Income Tax Act, all companies and partnerships (including non-incorporated partnerships) carrying out business in the country are liable to a corporate income tax at a rate of 15 per cent. Bulgarian resident entities are taxed on a worldwide basis. Foreign entities are taxed on their Bulgarian-source income. Companies are considered to be tax residents if they are registered in Bulgaria. Companies that are nonresidents in Bulgaria, but operate in Bulgaria through a branch, office, agency or other form of a permanent establishment are only liable to tax on the profits generated through their Bulgarian establishment.

Annual profit must be declared no later than 31 March of the year following the taxable year. Generally, the taxable profit is determined in accordance with the financial result reported in the Profit and Loss Statement adjusted for tax purposes. Depreciation for tax purposes is calculated by systematically applying the straight-line depreciation method. Depreciation norms for tax purposes on buildings, facilities, communication devices, electricity carriers should not exceed four per cent annually.

Tax credit for investment in depressed regions

Companies investing in depressed regions enjoy reduction of the corporate tax by 10 per cent of the amount invested in acquisition, modernisation or reconstruction of fixed assets including buildings, equipment, transmitters, electricity networks, telecommunication lines, machines, production facilities, transportation facilities (excluding personal cars), road cover, computers and peripheral devices, software and the right to use software. The cost of intangible assets should not exceed 25 per cent of the acquisition costs of the fixed assets. The acquired assets could not be disposed for a period of five years, except in cases of reorganisation of the company. The tax credit can be used for a period of five years.

Taxation of Individuals

Under the Personal Income Tax Act, tax-liable persons are individuals - residents and non-residents, and corporate entities explicitly enumerated therein. Residents are considered individuals who reside in Bulgaria longer than 183 days for each 365 days period. Residents are liable for their worldwide income. Non-residents are considered those individuals who do not fit the above criteria for residents. Nonresidents are liable only for their income derived from Bulgarian sources.

The annual taxable base is the sum of all taxable incomes received during the calendar year.The total annual income is subject to some adjustments and is then taxed in accordance with an annual progressive scale as follows:

Withholding Taxes

Certain types of income from sources in Bulgaria and payable to non-resident legal entities (if not generated through a permanent establishment) or individuals are subject to withholding taxes. The types of income are defined in CITA as:

• Dividends and liquidation quotas;
• Interest, including such under finance leases;
• Royalties;
• Technical services remuneration;
• Rents;
• Payments under operating leases, franchising and factoring;
• Remuneration under management contracts;
• Capital gains from transfer of shares in local companies, securities issued by the State, a municipality or a local entity and local real estate.

The withholding tax rate is seven per cent on dividends and liquidation quotas and 15 per cent on the other types of taxable income. The withholding tax rate may be reduced under an applicable double tax treaty.

Withholding tax exemption for EU citizens

Dividends and liquidation shares, distributed by a local person in favour of a foreign natural or legal person, local for an EU member-country, are not subject to withholding tax under the conditions that:

1. According to the tax legislation of the respective EU member-country the person is considered as local of this country for tax purposes and by force of an agreement for avoiding the double tax levying with a third state is not considered as local person of a state out of the EU;
2. The person is levied with corporate tax, without having right of choice or exemption from levying with this tax;
3. The person is the actual possessor of the income and holds at least 20 per cent of the shares/stocks of the local entity;
4. By the moment of calculating of the dividends or the liquidation shares the person has owned the shares/stocks of item three continuously for a period not shorter than one year.

VAT

The VAT legislation in many aspects follows the provisions of the Sixth Council Directive 77/388/EEC on the common system of VAT and the uniform basis for its assessment. The standard VAT rate is 20 per cent. There is no VAT on land transfer deals.

Bulgarian and foreign businesses which carry out taxable transactions with a place of supply in Bulgaria and have a taxable turnover of at least BGN 50,000 during the preceding twelve months are obliged to register for VAT purposes. Non-residents, except for branch offices, are registered for VAT through a VAT representative. Voluntary VAT registration is limited to some specific cases (e.g. if a company incorporated in Bulgaria has a registered and paid up share capital of at least BGN 500,000). There are special rules for the VAT registration in some cases of commercial companies’ transformation and acquisition.

VAT Credit Refund

The VAT credit to be refunded can be set off against the VAT due, as well as against other liabilities to the state.The offsetting takes place during a three-month term following the month in which the VAT credit occurred. If after this term there is still VAT to be refunded, the taxpayer may request a refund or continue offsetting it in the following months. Within three months of the date of submitting the request for refund, the tax authorities have to refund the remaining VAT after setting it off against any outstanding tax liabilities (there are indications that the second three-month term may be reduced to 45 days).

Biography

Eli Moneva is Vice President of the Central European Real Estate Associations Network (CEREAN) and a member of the Board of Directors of the National Real Property Association, a non-governmental organisation which works with companies operating in the property market in Bulgaria. Ms Moneva is also the Executive Director of BBF OOD, one of the first private companies in Bulgaria that specialize in property management and renting.