Most foreigners buying property in Bulgaria must form a limited company to purchase land, so they will be subject to corporation tax. If you buy a property with land in Bulgaria, you must form a limited company and pay corporation tax.
Corporation tax has been cut several times in the past few years by the Bulgarian government to encourage inward investment and now stands at 15 per cent. This means that if you sell your property, any gain you’ve made on it will count as a profit for your limited company and will be taxed at 15 per cent. Any profit you make from rental income will also be taxed at 15 per cent, although you may make certain deductions, including depreciation (calculated at 4 per cent per year) and expenses such as repairs, maintenance, renovation and interest on loans used for the acquisition of the property.
If you don’t have any business activity during the year (i.e. you don’t sell your property and you have no rental income), you will still need to file a ‘zero’ tax return. Your accountant will be able to file your return in your absence if you provide him with power of attorney and many estate agents offer a tax return service.
Value added tax
There’s a single rate of value added tax (VAT) in Bulgaria, which is 20 per cent. VAT is payable on all products and services in Bulgaria and on imports to the country. Every business that has an annual turnover of more than 50,000 lev (€25,000) must register for VAT.
If you’ve purchased your property as an individual (i.e. not through a limited company) you don’t have to worry about VAT, but if you purchased it through a limited company (i.e. if it has land) you may have to add VAT to the selling price. If it’s your first property, you will most likely not be registered for VAT (because your company will almost certainly have a turnover of less than 50,000 lev even if you’ve been letting it), so you will only need to register for VAT after the sale (and if the selling price is over 50,000 lev).
If and when you come to sell a second property, you will then need to add 20 per cent VAT to the selling price, as well as adding VAT to any rental charges. You must also open a separate bank account for VAT payments.
There are usually two property taxes to be paid: one is a tax at 0.15 per cent on the declared purchase price of the property, e.g. E7.50 for a property worth E50,000, and the other a small levy for waste collection, although in some villages there’s no collection service and therefore no tax. You must pay both taxes (if applicable) at the municipal council offices. Some agents and accountants offer a property tax payment service, but the fee can often be out of proportion to the amount of tax due.
Capital gains tax
Technically, there’s no capital gains tax (CGT) in Bulgaria, but under certain circumstances capital gains are taxed at 15 per cent (and if that isn’t a capital gains tax, what is!?).
Beware of the practice of understating a property sale price on the contract: while this may reduce the vendor’s tax bill and some of your fees, when you come to sell the property it will appear as if you’ve made a larger capital gain than you actually have and you will be taxed accordingly.
Your liability for tax depends on various factors and differs according to whether you’re a resident or non-resident of Bulgaria (see below).
Capital gains tax is a complex subject, particularly if you aren’t a Bulgarian resident for tax purposes, and you should consult an independent financial adviser before making any major financial decisions.
If you aren’t resident in Bulgaria for tax purposes, i.e. your Bulgarian property isn’t your principal residence but a second home or investment property, any gain you make on its sale is taxed at 15 per cent. If you’ve bought a Bulgarian property as an individual non-resident (i.e. a property without land), you must pay tax on the difference between the purchase and sale price; there are no allowances or adjustments for inflation.
Because this tax isn’t classed as CGT, you will still be liable for capital gains in your the country where you’re resident and won’t be able to offset the Bulgarian tax payment against it but will effectively pay CGT twice – 15 per cent in Bulgaria and whatever rate applies in your home country.
If you purchased through a limited company (i.e. a property with land), you will be subject to corporation tax on the profit (also at 15 per cent) and may also be liable for CGT in your country of residence.
If you’re a resident of Bulgaria for tax purposes and not taxed as a limited company (i.e. you’ve bought a property without land), you don’t have to pay tax on the sale of a property if it’s your primary residence and you’ve owned it for more than five years. If your property isn’t exempt, you must pay tax at 15 per cent on any gain as if you were a non-resident (see above).
Inheritance & gift tax
Your country of domicile is particularly important when it comes to inheritance tax.
Inheritance tax was partially abolished in 2005. Currently, your immediate relatives and surviving spouse won’t have to pay inheritance tax, while brothers, sisters and their children will have to pay 0.7 per cent on amounts above 250,000 lev (€125,000).
Gift tax is payable at fixed rates depending on the relationship between the donor and the recipient. Spouses and direct line inheritors are exempt. Gifts between brothers and sisters are taxable at 0.7 per cent, and all other beneficiaries are taxed at 5 per cent.
It’s an unfortunate fact of life that you’re unable to take your hard-earned assets with you when you take your final bow (or come back and reclaim them in a later life!). All adults should make a will, irrespective of how large of small their assets. The disposal of your estate depends on your country of domicile.
It’s possible to make two wills, one relating to Bulgarian property and the other to foreign property. Opinion differs on whether you should have separate wills for Bulgarian and foreign property, or a foreign will with a codicil dealing with your Bulgarian property, or vice versa.
Most experts believe that it’s better to have a Bulgarian will from the perspective of winding up your Bulgarian estate and a separate will for any other country where you own assets. Note, however, that getting a Bulgarian will drawn up may be next to impossible!
If you do have Bulgarian and foreign wills, make sure they don’t contradict one another – or worse, cancel each other out (e.g. when a will contains a clause revoking all other wills)!
This article is an extract from Buying a Home in Bulgaria.
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