Tax treatment of investments in real estate

I. DIRECT INVESTMENTS IN REAL ESTATE

1.1 Legal aspects

Until 2012, under Bulgarian law, companies and individuals not established in Bulgaria were not allowed to acquire land, but only buildings. This law has been amended and now EU citizens have the right to own regulated land in Bulgaria in their own name.

1.2 Acquisition of real estate and permanent residence ("PV") risk

According to the Bulgarian tax authorities’ enforcement of the law, the mere ownership of real estate in Bulgaria does not automatically create a PV of the owner, which means that the owner will not be assessed for tax as a Bulgarian resident (for assessments of non-residents, please refer to Sections 1.5-1.6 below).

It is accepted that there is no PV, if the non-resident owner of real estate:

• Does not have an office or other house and premises in Bulgaria, from which the property is rented, managed, etc.;
• Does not employ employees, or other non-independent agents in Bulgaria;

The owner is entitled to authorize an attorney or other non-independent agent in Bulgaria by means of a precisely defined power of attorney, to represent the owner before the state authorities and other third parties, to sign documents, etc. However, the main business decisions regarding the real estate must be taken and executed by the owner.

1.3 Rental of real estate

Income of non-resident owners (individuals) from rental of real estate is subject to payment of 15% tax in Bulgaria. Companies are liable to tax on their taxable profit at a tax rate of 10%. The tax is levied on the gross income received by the non-resident.

The tax is withheld as follows:

• If the tenant is a Bulgarian company or other entity, the tax is withheld and remitted to the tax authorities by the landlord on behalf of the non-resident landlord. The tax must be remitted to the tax authorities by the end of the month following the month in which the tenant recorded the rental costs in his accounts (regardless of whether the rent was actually paid on that date or not);
• If the tenant is an individual, the tax must be paid by the non-resident owner of the property, or by his representative, within 30 days from the date on which the tenant paid the rent.

1.4 Profit from sale of the property

Profit by non-resident companies and individuals from sale of Real estate is subject to 10% tax in Bulgaria.

The tax rate of capital gains is calculated as the positive difference between the sale price of the real estate and the higher of (i) the purchase price of the real estate and (ii) the value of the real estate for tax purposes, minus 10% of deemed costs calculated on the basis of the taxable difference. This value is calculated by the tax authorities, based on the specific legal provision of the Local Tax Act.

The terms and procedures of administration and payment of the tax to be withheld are the same as those stated in Section 1.3. above.

1.5 VAT

1.5.1 VAT when purchasing real estate

When the seller of the real estate is a VAT-registered Bulgarian company or individual, the non-resident buyer pays 20% VAT on top of the purchase price of the real estate. The VAT is calculated on the taxable value of the building. The value of the right to build on the land is exempt from VAT, as this right is considered an exempt provision under the Bulgarian VAT Act.

VAT withheld for non-resident buyers of real estate is not reclaimable unless the buyer is registered for VAT in Bulgaria on the date the purchase is concluded (for details on VAT registration of non-residents, see Section 1.6 below).

However, the above VAT may be reclaimed by the buyer even if the VAT registration was entered into after the date of purchase of the real estate, provided that the real estate is still in the buyer's possession on the date of VAT registration. In other words, in order to reclaim VAT after purchasing the property, the non-resident purchaser must not sell the property before the date of VAT registration.

With the above in mind, it is advisable that the time of purchase of the property, the non-resident VAT registration (if applicable) and the subsequent sale of the property are timed to enable the reclaim of VAT on the initial purchase price.

See below for more details regarding the requirements for VAT registration.

1.5.2 Letting of the property

Letting of property is considered a VAT taxable facility unless the property is let to an individual for use for non-business purposes.

Where the property is let by the owner to a firm or other entity or individual for use for business purposes, the following tax is payable implications:

The non-resident owner of real estate will have to register for VAT, if and when the total amount of rent payments exceeds BGN 50,000 (approximately 26,000 euros) within any twelve-month period. According to the Tax Act, companies can register as an option. For details regarding the requirements for VAT registration of non-residents, see Section 1.6 below;.

• At the time the non-resident owner of the property registers for VAT, he is entitled to a refund of the VAT amount paid on the purchase of the property, provided that the property is still in his possession on the date of VAT registration;
• After the VAT registration has taken place, the owner of the property will charge 20% VAT on the rental of the property.

1.5.3 Sale of the property

Sale of the property is a VAT taxable facility in Bulgaria.

The implications regarding the tax are as follows:

• If the owner is not registered for VAT, he will not charge VAT on this sale of the property;
• If the non-resident owner of the real estate was not registered for VAT prior to the date of sale, and the taxable value of the sold real estate exceeds BGN 50,000, which will be the case in most cases, the owner will have to register for VAT. After being registered, he will have to charge VAT on every subsequent sale or lease of real estate in Bulgaria. If such transactions are not made by the non-resident owner during the next 18 consecutive months after the VAT registration date, the VAT registration must be terminated;
• If the owner of the real estate was registered for VAT prior to the date of sale (for example, on the basis of lease of the real estate as considered in Section 1.5.2 above), he must charge 20% VAT upon sale of the real estate on the taxable value of the buildings. No VAT is charged on the value of the right to build on the property.

The tax rate (tax value) for calculating VAT on the sale of buildings is determined as the highest of (i) the sales price agreed between the parties, increased by the transfer tax and costs, and (ii) the valuation value of the building for tax purposes. VAT of 20% is determined on the tax rate and then reduced by the transfer tax and costs paid on the sale of the building.

1.6 VAT registration for non-residents

a) Conditions for VAT registration

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

• he carries out VAT taxable services with a place of performance in Bulgaria; and
• the volume of these services is greater than or equal to BGN 50,000 in a period of less than 12 months;
• registration is taken as an option.

Rental and sale of real estate located in Bulgaria are considered services with a place of performance in Bulgaria.

b) Procedure of VAT registration for non-residents

A non-resident who meets the conditions under point a) above is obliged to obtain VAT registration in Bulgaria through an authorized tax consultant ("VAT agent").

There are three main steps, which must be taken sequentially, as follows:

• Appointment of a VAT agent by the non-resident company. Only Bulgarian resident entities or individuals can be appointed as VAT agents;
• Filing the application and obtaining a general tax registration. General tax registration must be done at the local tax office where the real estate is located; and
• Obtaining VAT registration. An application for VAT registration must be filed within 14 days from the end of the month in which the turnover reaches BGN 50,000 (see a). above).

c) Consequences of VAT registration

From the date of VAT registration, non-resident owners of real estate must act in accordance with all requirements of the Bulgarian VAT Act, which applies to all VAT-registered residents and non-resident persons in Bulgaria, and in particular:

• From the date of VAT registration, the owners are obliged to charge VAT on all taxable services with Bulgaria as their place of performance (for example, rental, sale of the real estate, etc.);
• The owner must prepare and submit monthly VAT returns, and VAT purchase and sale accounts. The documents are submitted with the assistance of the appointed VAT agent;
• The owner is obliged to pay the statutory VAT provisions no later than the 14th day of the month following the month in which the VAT obligations were entered into by the VAT agent;

The owner can reclaim the VAT paid in Bulgaria on purchases according to the general rules for deduction of VAT.

1.7 Transfer tax. Local tax and costs

As of 2008, 3% transfer tax is due on the taxable value of the property when selling the property. The tax is usually paid by the buyer, but it can be divided between the buyer and seller by mutual agreement. In addition, the parties must pay the notary's fee. This amount is calculated in proportion to the value of the property.

The owner of the property must declare the acquisition of the property at the local tax office where the property is located within 2 months from the date of purchase of the property. In addition, the owner must pay the annual property tax and waste disposal tax. This amount is calculated on the taxable value of the property.

II. INVESTMENTS BY A BULGARIAN (SUBSIDIARY) COMPANY

2.1 Legal Considerations

Under current Bulgarian law, non-resident companies and individuals are allowed to establish a Bulgarian entity without any restrictions. Bulgarian entities owned by foreign shareholders are allowed to acquire any kind of real estate in Bulgaria, including land.

2.2 Tax implications for companies

2.2.1 Rental and sale of real estate

Income of the Bulgarian (subsidiary) company of non-residents (hereinafter referred to as "the Bulgarian company") from rental and/or sale of real estate is taxed according to the general rules of the Bulgarian Corporate Income Tax Act ("the WIB").

The income tax rate for companies is 10%.

The tax is levied on the basis of the company's profit according to the profit and loss account, adjusted by certain non-deductible items.

2.2.2 Claiming profits - dividend

The Bulgarian company's after-tax profit can be distributed as dividends to non-resident shareholders.

According to the WIB, dividends are subject to 7% withholding tax in Bulgaria. Withholding tax is not due in Bulgaria in case the shareholders in the Bulgarian company are tax residents in an EU country and:

• The shareholders are not considered tax residents of a third country under a Double Taxation Treaty.
• The shareholders pay income tax in their country of residence and are not entitled to tax exemptions, etc.;
• The non-residents hold at least 20% of the shares in the Bulgarian company distributing the dividend, for a period of at least 1 year.

In summary, if the shareholders are tax residents of a country that is not an EU country, the withholding tax will be 7%. If the Bulgarian company is owned by a company established in the Netherlands, and the above requirements are met, no dividend tax will be due in Bulgaria.

2.2.3 Claiming profits - winding up the company

When winding up the Bulgarian company, the tax implications are as follows:

• The company must pay 10% income tax on the total profit from the beginning of the relevant fiscal year to the date the company is wound up by the court;
• On the winding-up proceeds - if greater than zero - 7% tax is withheld for distribution to the shareholders.

For tax purposes, the taxable amount of the winding-up proceeds is proportional to the share of each shareholder in the registered capital of the company, reduced by:

• The purchase price of the share in the company (usually equal to the nominal value of the shares), and
• The respective part of the revaluation reserve, - if greater than zero - which does not increase to had the effect of the reservation on the depreciation costs of the company.

If the shareholders are tax residents of an EU country, no tax will be due on the proceeds of the dissolution, subject to the conditions stated in Section 2.2.2 above.

2.3 VAT

2.3.1 VAT on purchase of real estate

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

• The real estate consists of a plot of land without buildings, then from 1 January 2007 the selling party will charge VAT to the Bulgarian company, since the purchase and sale of land is not exempt from VAT according to the Bulgarian Tax Law;
• If the real estate consists of land and buildings, 20% VAT will be charged on the taxable value of the building. No VAT is charged on the purchased land.

VAT charged to the Bulgarian company before VAT registration is completed is non-refundable. In case the Bulgarian company has subsequently completed VAT registration, the VAT on the purchase price can be refunded, provided that the property is owned by the Bulgarian company on the date of registration.

2.3.2 VAT registration

The Bulgarian company will have to register for VAT, if the conditions of the Bulgarian VAT Act for registration require it (same conditions as for non-residents, see section 1.6 a) above).

2.3.3 VAT on rental of real estate

Rental of the real estate is considered a VAT taxable transaction in Bulgaria, unless the real estate is rented to an individual for non-business purposes. When the value of the rental payments exceeds BGN 50,000 within a period of 12 months, the Bulgarian company is obliged to register for VAT.

2.3.4 VAT on sale of the real estate

Sale of the real estate consisting only of a plot of land is a taxable transaction on which VAT is charged by the Bulgarian company.

In case of sale of real estate consisting of both land and buildings, 20% VAT is charged on the taxable value of the buildings, provided that the Bulgarian company is VAT registered.

The tax rate (taxable value) for calculating VAT on sale of buildings is determined as the higher of (i) the sales price agreed between the parties, increased by the transfer tax and costs, and (ii) the valuation value of the building for tax purposes. VAT of 20% is set on the tax rate and then reduced by the transfer tax and fees paid upon sale of the building.

If the Bulgarian company is not VAT registered from the date of sale:

• No VAT will be charged on the value of the property sold, and
• The Bulgarian company will have to register for VAT, if the value of the property exceeds BGN 50,000.

2.4 Transfer tax and local taxes and fees

See Section 2.3.4 above.