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TAX TREATMENT OF INVESTMENT IN REAL ESTATE

 

 I. DIRECT INVESTMENT IN REAL ESTATE

 1.  Legal considerations

 According to the Bulgarian legislation in force, non-resident companies and individuals are not allowed to acquire land but only buildings and limited rights on land (right to use and construction right). In view of this, we will comment only the scenario where non-Bulgarian individuals or companies buy building together with the respective part of the right of construction on the land, both referred to as "real estate". As per Bulgarian law, right of construction is a specific right on land allowing its owner to build on the land within specific limitations (e.g. an apartment, a whole building, etc.), the right to become an owner of the built premises and the right to rebuild the latter in case they are damaged or demolished.

2.  Acquisition of real estate and permanent establishment ("PE") risk

 According to the practice of Bulgarian tax authorities, mere ownership of real estate in Bulgaria does not automatically create a PE of the owner, meaning that the latter shall not be taxed as a Bulgarian tax resident.

  More specifically, it is accepted that no PE exists if the non-resident owner of real estate:

  •  Does not have an office or other premises in Bulgaria through which the property is leased, managed, etc;
  •  Does not have employees or other dependent agents in Bulgaria;

 The owner may have a proxy or other independent agent in Bulgaria authorized by means of an explicit power of attorney to represent the owner before the state authorities and other third parties, to sign documents, etc. However, main business decisions relating to the real estate should be taken and executed by the owner.

3.  Lease of real estate

 Income of non-resident owners (individuals) from lease of real estate is subject to 10% withholding tax in Bulgaria. Companies are taxable on their taxable profit with a tax rate at 10%. The tax is imposed on the gross income received by the non-resident.

 The withholding tax is administered as follows:

  • If the lessee is a Bulgarian company or other entity, the tax is withheld and remitted to the budget by the lessee on behalf of the non-resident lesser. The tax should be remitted to the state budget by the end of the month following the month in which the lessee has accrued the rent as a cost in its accounting books (regardless of whether the rent has been actually paid or not as at the date of its accrual);
  • If the lessee is an individual, the tax should be paid by the non-resident owner of the real estate, respectively by its representative, within 30 days as of the date on which the rent has been paid by the lessee.

 4. Gains from sale of real estate

 Gains of non-resident companies and individuals from sale of real estate are subject to 10% withholding tax in Bulgaria.

 Tax base of capital gains is calculated as the positive difference between the sales price of the real estate and the higher between (i) the acquisition price of the real estate, and (ii) the value of the property for tax purposes, less 10% deemed expenses calculated on the base of the taxable difference. This value is calculated by the tax administration based on the specific provisions of the Local Taxes and Fees Act.

5.  VAT upon purchase of the real estate

If the seller of the real estate is a VAT registered Bulgarian company or an individual, the non-resident buyer/s shall pay 20% VAT upon purchase of the property. The VAT will be charged on the tax value of the building and no VAT shall be charged on the value of the right of construction on land since transfer of such right is considered an exempt supply under Bulgarian VAT Act.

VAT charged to the non-resident buyer/s of the real estate will not be recoverable unless the buyer/s are registered for VAT in Bulgaria as at the date of the purchase.

However, the above VAT may be recovered by the buyer/s of the real estate even if their VAT registration is affected after the date of the purchase of the real estate, provided that the property is still available with the non-resident buyer/s as at the date of their VAT registration. In other words, in order to get back VAT charged upon purchase of real estate, the non-resident buyer/s should not dispose of the property before the date of their VAT registration.

Having in mind the above, it is advisable that the timing of the purchase of the property, VAT registration of non-residents (if any) and subsequent sale of the real estate be scheduled in a way allowing the recovery of the VAT charged upon the initial purchase of the real estate. For more details on VAT registration requirements see below.

6.  Lease of real estate

Lease of real estate is considered VAT taxable supply in Bulgaria unless the property is leased to an individual using it for non-business purposes.

If the property is leased by the owner/s to a company or other entity or individual using it for business purposes, the following tax implications shall arise:

  • The non-resident owner/s of the real estate will have to register for VAT if and when the aggregate amount of the rent payments exceed BGN 50,000 (app. Euro 26,000) within any given twelve month period. Under the VAT Tax Act companies could register themselves as an option;
  • If and when the non-resident owner/s of the real estate register for VAT, they will be entitled to recover the VAT charged upon purchase of the real estate, provided that the latter is not disposed of as at the date of the VAT registration;
  • After being VAT registered, the owner/s of the real estate shall charge 20% VAT on the rent of the real estate;

7.  Sale of real estate

 Sale of real estate is a VAT taxable supply in Bulgaria. Its tax implications would be as follows:

  • If the owner/s are not registered for VAT, they will not charge VAT on this particular sale of the real estate;
  • If the non-resident owner/s of the real estate had not been registered for VAT before the date of the sale and the tax value of the sold property exceeds BGN 50,000, which most probably will be the case, the owner/s should register for VAT. After being registered, they should start charging VAT on any subsequent sales or leases to immovable property located in Bulgaria. If no such transactions are carried on by the non-resident owner/s of the real estate during the next consecutive 18 months after the date of the VAT registration, the VAT registration should be terminated;
  • If the owner/s of the real estate had been registered for VAT before the date of the sale (for example, based on lease of the property as envisaged in Section 3. above), they should charge 20% VAT upon sale of the property on the tax value of the buildings. No VAT shall be charged on the value of the construction right on real estate.

The tax base (tax value) for charging VAT upon sale of buildings is determined as the higher value between (i) the agreed between the parties sales price, increased with any transfer taxes and fees, and (ii) the valuation of the building for tax purposes. VAT of 20% is assessed on the envisaged tax base and then reduced with the transfer taxes and fees paid upon sale of the building.

8.  VAT registration of non-residents

     a) Requirements for VAT registration

As it was mentioned above, a foreign entity or individual is obliged to register for VAT if:

  • Carries out VAT-taxable supplies with a place of supply in Bulgaria; and
  • The volume of such supplies is equal or exceeds BGN 50,000 in any period not exceeding 12 months;
  • The registration could be optional.

Lease and sale of immovable property located in Bulgaria are considered supplies with a place of supply in Bulgaria.

b)  Procedure of VAT registration of a non-resident

A non-resident who fulfils the requirements discussed in point a) above is obliged to obtain a VAT registration in Bulgaria through an authorized tax representative ("VAT agent").

There are three major steps, which need to be completed in consecutive order, as follows:

 

  • Appointment of a VAT agent by the non-resident company. As a VAT agent can be appointed only Bulgarian resident entity or individual;
  • Filing for and obtaining of a general tax registration. General tax registration should be made with the local tax office where the acquired real estate is located; and
  • Obtaining VAT registration. An application for a VAT registration should be filed within 14 days as of the end of the month when the turnover of BGN 50,000 is reached (see a) above).

 

    c)  Consequences of the VAT registration

As of the date of its VAT registration, non-residents owner/s of the real estate have to comply with all requirements of the Bulgarian VAT law applicable to all VAT-registered resident and non-resident persons in Bulgaria, and in particular:

  • As of the VAT registration date they are obliged to charge VAT on all taxable supplies carried out with a place of supply in Bulgaria (e.g. on subsequent lease, sale of immovable property, etc.);
  • The owner/s should prepare and file monthly VAT returns, VAT purchase and sale ledgers. The documents are filed with the assistance of the appointed VAT agent;
  • The owner/s are obliged to settle its VAT liabilities no later than 14th day of the month following the month of incur of the VAT liabilities through its VAT agent;
  • The owners may recover Bulgarian VAT incurred by them on purchases under the general rules for deduction of VAT. 

9. Stamp duty. Local taxes and fees

 Upon sale of real estate, stamp duty of between 2% and 3% on the tax valuation of the real estate is due. The tax is payable usually by the buyer but it may be split between the seller and the buyer, upon agreement between them. In addition, the parties should pay notary fees the amount of which is calculated in proportion to the value of the property.

 The owners of the real estate should declare the acquisition of the real estate to the local tax office where the property is located within 2 months as from the date of the acquisition of the real estate. In addition, the owners should pay annually local tax on real estate and garbage collection fee, the amount of which is calculated on the base of the tax value of the real estate.

 II. INVESTMENT THROUGH A BULGARIAN SUBSIDIARY

1.  Legal considerations

 Under Bulgarian legislation in force, non-resident companies and individuals are allowed to set up Bulgarian entities without any restrictions. Bulgarian entities owned by foreign shareholders are allowed to acquire any kind of real estate in Bulgaria, including land.

2.  Corporate tax implications

    2.1.  Lease and sale of real estate

 Income of the Bulgarian subsidiary of the non-residents (hereinafter referred to as "the Bulgarian company) from lease of immovable property and/or from sale of such property are taxed under the general rules of the Bulgarian Corporate Income Tax Act (the "CITA").

 The rate of corporate tax is 10%.

 The tax is levied on the base of the profit of the company as per its profit and loss account, adjusted with certain non-deductible items.

    2.2.  Repatriation of profit - dividends

 After-tax profit of the Bulgarian company may be distributed as a dividend to the non-resident shareholder/s.

 As per the CITA, dividends are subject to 7% withholding tax in Bulgaria. Withholding tax will not be due in Bulgaria in case the shareholder/s in the Bulgarian company are tax residents of an EU country and:

  • The shareholder/s are not considered tax residents of a third state on the grounds of a Double Tax Treaty;
  • The shareholder/s are payers of corporate income tax in their state of residence and are not entitled to any tax exemptions, tax holidays, etc.;
  • The non-residents hold at least 20% of the shares in the Bulgarian company distributing the dividends for an interrupted period of at least one year.

 To summarize, if the shareholder/s are tax residents of the Isle of Man, which is not a EU country, the withholding tax on dividends will be 7%. If the Bulgarian company is owned by an UK resident company and the requirements envisaged above are met, no withholding tax on dividends shall be due in Bulgaria.

    2.3.  Repatriation of profit - liquidation of the company

 Upon liquidation of the Bulgarian company, the following tax implications shall arise:

  • The company shall pay 10% corporate income tax on its profits accumulated as from the beginning of the respective fiscal year to the date of the termination of the company by the court;
  • Liquidation proceeds, if any, are subject to 7% withholding tax before distribution to the shareholder/s.

 For tax purposes the taxable amount of the liquidation proceeds represents the respective part of the company's equity, proportionate to the share of each shareholder in the registered capital of the company, reduced with:

  • The acquisition price of the shares in the company (usually it is equal to the par value of the shares), and
  • Respective part of the revaluation reserve, if any, which did not entail increase of the accounting depreciation costs accrued by the company.
  • If the shareholder/s are tax residents of an EU country no tax on liquidation proceeds shall be due, subject to the requirements envisaged in Section 2.2. above.

3.  VAT

    3.1.   VAT upon purchase of the real estate

If the Bulgarian company buys real estate from a VAT registered Bulgarian company or individual, and:

  • The real estate consists of regulated land without any buildings on it, from 1st of January 2007 VAT shall be charged to the Bulgarian company by the seller since the sale and purchase of land is not a VAT exempt supply according to Bulgarian VAT Act;
  • If the real estate consists of both, land and buildings on it, 20% VAT shall be charged on the tax value of the building. No VAT shall be charged on the land acquired.

 VAT charged to the Bulgarian company prior to its VAT registration will not be recoverable. In case of subsequent VAT registration of the Bulgarian company, it will be entitled to recover the VAT charged upon purchase of the real estate, provided that the latter has not been sold or otherwise disposed of prior to the date of the registration.

    3.2.  VAT registration

 The Bulgarian company shall register for VAT if the requirements of Bulgarian VAT Act for such registration are met (the requirements are the same as those applicable to non-residents envisaged in Section 2.5.4 a) above)

    3.3.  VAT on lease of real estate

 Lease of real estate is considered VAT taxable supply in Bulgaria unless the property is leased to an individual using it for non-business purposes.

 If the value of the lease payments exceeds BGN 50,000 within any given 12 month period, the Bulgarian company will be obliged to register for VAT.

    3.4.  VAT upon sale of real estate

  • Sale of real estate consisting only of regulated land is taxable supply and VAT should be charged by the Bulgarian company.
  • Upon sale of real estate consisting of both land and buildings, 20% VAT should be charged on the tax value of the buildings, provided that the Bulgarian company is VAT registered. Tax base (tax value) for charging VAT upon sale of buildings is determined as the higher between (i) the agreed sales price, increased with any transfer taxes and fees, and (ii) the valuation of the building for tax purposes. VAT of 20% is assessed on the envisaged tax base and then reduced with the transfer taxes and fees paid upon sale of the building.
  • If the Bulgarian company is not VAT registered as at the date of the sale:

- No VAT shall be charged on the value of the property sold, and

- If the value of the property exceeds BGN 50,000 the Bulgarian company should register for VAT.