Property Tax Guide - Bulgaria

General

Bulgaria is a politically stable country, and the introduction of a currency board in 1997 stabilized the country's economy.

As with every country, there is legislation governing real estate. A foreign investor can invest in properties in Bulgaria either directly or through a local entity, (i.e. a Bulgarian Company). Only Bulgarian-resident individuals and entities can acquire title to land, while non-residents may acquire only buildings and limited rights, such as leasehold and construction rights, to land.

Foreign investors are guaranteed full repatriation of profits resulting from an investment in Bulgaria. Once the bank effecting the transfer has been presented with a certificate proving payment of all Bulgarian taxes due, the transfer abroad can be made.

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. If foreign investors invests in Bulgaria directly, then the tax treatment of those investors depends on whether or not their activities constitute a permanent establishment. However, you should bear in mind that 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 15% withholding tax on the rentals and capital gains, unless an even lower rate is applied under a double tax treaty.

Basis of taxation

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

Rental income

The taxable income of a company investing in Bulgarian property is calculated as the gross income acquired from the property less any tax-deductible, property-related expenses and depreciation (expenses include repairs, maintenance, renovation and similar costs and interest on loans used for the purchase of the property). A Municipal Tax at a rate of 10% of profits is payable. This is then deductible in calculating taxable profits which are subject to a flat corporate tax rate of 15%.

Depreciation

Land itself is not depreciable, although any immovable property upon it is, provided that it is used for the business activities of the company and is classified 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. Any property that is acquired for the 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.

Capital gains

Capital gains are classified as ordinary income and are subject to corporate income tax.

Transfer taxes

Apart from corporate tax, no other direct taxes are levied on the transfer of property. Notary and municipal fees are, however, payable on the transfer. 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 property is located.

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 have to pay waste-collection fees.

Value Added Tax (VAT).

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

A registration with the Bulgarian National Bank is, under currency control regulations, 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 or limited property rights, etc. may be subject to in kind contributions after a special evaluation is performed.