The Value Added Tax Act 2007

Some of the main changes that specifically concern the property owners in Bulgaria are as follows:

1. Voluntary registration

The new VAT Act introduces the voluntary VAT registration - any entity that carries out business in Bulgaria can apply for voluntary VAT registration irrespective of the turnover reached. The compulsory VAT registration threshold remains BGN 50,000 for any 12 months period.

2. Transactions with land and buildings

Transactions with new buildings remain subject to VAT, while transactions with buildings for which the permission to use (also known as Act 16) has been issued prior to 60 months are exempt, unless the seller opts out to treat them as taxable. The transactions with the underlying plots of the buildings are subject to the same rules.

As from the beginning of 2007 transactions with regulated plots are also taxable for VAT purposes.

3. VAT tax credit for long-term assets

The right to VAT tax credit for long-term assets depends on whether they are used for taxable or exempt transactions within a term of 5 years. In cases of real estate the term is 20 years.

4. Import and export of services

When a Bulgarian VAT registered entity exports services to foreign entities no VAT is charged and the entity is entitled to full tax credit for the related input VAT.
5. Tax base

The new VAT Act excludes the indemnities and the interest for late payment from the tax base. The rule that the transaction value cannot be lower than the cost remains applicable for regulated plots and new buildings.

Summary:

1) The voluntary VAT registration has been introduced regardless of the taxable turnover;
2) The introduction of “exempt status” (as an option only) for the property which has had permission to use for at least 5 years. Thus resale of property would not be a problem for many foreign investors who had to register for VAT when (for example) they renovate and resell a village house.

The Income Tax Act 2007

Under the Bulgarian Income Tax Act the tax liable persons are the individuals that irrespective of their citizenship:

  • have their permanent domicile in Bulgaria;
  • reside in the country for more than 183 days in a 365-day period;
  • they have permanent establishment in Bulgaria (regarding family, property, place of professional or business activity)

 

If we assume that we are not referring to a local individual (none of the above criteria is applicable) the following applies to a foreign person:

Withholding tax of 10% is due for the following type of income derived from Bulgarian property:

  • Property rental income – this is determined as the gross amount of the rental income;
  • Income from sale or exchange of property – this is determined as 90% of the difference (if positive) between the selling price and the acquisition cost.

 

In point 2 above the withholding tax is payable by the buyer of the property by the end of the month following the end of the quarter in which the change of ownership took place (the Notary Deed date is to be considered as the date of the transaction).

Income from sale or exchange of property is not taxable in Bulgaria if:

  • the person who receives the income is ordinary resident for tax purposes in any EU member state;
  • during the Bulgarian tax year the person sells not more than one residential property regardless of the date of its acquisition;
  • during the Bulgarian tax year the person sells not more than two properties, if they have been owned for more than 5 years.

 

In Bulgaria the tax year matches the calendar year.

The circumstances in point 1 above are certified with a statement from the foreign person’s local Revenue Agency. The circumstances in points 2 and 3 are certified by the seller with a written declaration provided to the buyer of the property.

Summary:

  • As per the new changes in the Income Tax Act 2007, income derived from the resale of Bulgarian property is not taxable in Bulgaria provided that the foreign person who receives the income certifies that he/she is an EU taxpayer. However, Capital Gains Tax would be payable at the local rate in the taxpayer’s country of residence;
  • Withholding tax of 10% is always applicable for the rental income from property owned by non-residents;
  • Note that the withholding tax from the sale of the property is payable by the buyer;

 

The Corporation Tax Act 2007

The new Corporation Tax Act does not have many changes that concern the foreign property owners in Bulgaria. However, using a Bulgarian company as an asset holding vehicle still remains a good option mainly because of the newly introduced Corporation Tax rate of 10%.

Bulgarian company or purchase as individual - tax planning for foreign individuals who invest in Bulgarian property:

A foreign individual who decides to invest in property in Bulgaria has two options:

  1. Invest in property which he purchases as an individual.
  2. Incorporates a company in Bulgaria and the entity owns the property.

 

Important note:

Option one above is valid only if an apartment or a house is bought without the land. The Bulgarian Constitution does not allow foreign individuals to acquire land until 2012. However, the foreign individual can purchase the land via a Bulgarian registered company.

Option two above has also other advantages:

  1. All rental income from the property located in Bulgaria will be considered trading income of the company and will be taxed with corporation tax of 10% after deduction of all expenses related to the property. This can substantially decrease the taxable profit. If the property is owned by the foreign individual – the rental income will be taxed in his own country as a personal income (see above the Income Tax Act comments).

 

  1. The capital gains from the sale of the property in Bulgaria are included in the corporate income and taxed at the corporation tax rate of 10% only (after deducting the acquisition cost of the property). As a comparison – if the individual owns the property he will be liable to capital gains tax in his own country. The capital gains tax in most of the European countries varies between 25-50%.
  1. Profit repatriation is easier and more beneficial when distributed as a company dividend. The maximum tax payable on profit distribution to the foreign shareholders of Bulgarian companies is 7%.

 

The use of Bulgarian companies as investment vehicles may have additional tax benefits for the investors which, however, depend on their personal circumstances.