Taxation
Investing through a local entity versus direct investment.
As indicated in Property in
Bulgaria section, a foreign investor can invest in properties
in Bulgaria either directly or through a local entity. In the case of a direct
investment, the tax treatment of the foreign investors depends on whether or
not their activities constitute a permanent establishment. 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 basis of the taxable income
of a company, investing in Bulgarian real property is the gross income derived
from the property less tax-deductible property-related expenses and
depreciation. Such expenses include repairs, maintenance, renovation and
similar costs and interest on loans used for the acquisition of the property. A
Municipal Tax at a rate of 10% of profits is due. This is then deductible in
calculating taxable profits which are subject to a flat corporate tax rate of 25%.
- Depreciation
Land itself is not depreciable, although any immovable property affixed
there to is, provided that it is used for the business activities of the
company and is booked 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.
Real estate acquired for purpose of re-selling is considered as investment
property. As such, it is non-depreciable and is subject to annual revaluation
to the market value.
- Loss carry-forward
Tax losses can be carried forward for a five-year period. Losses cannot be
offset against profits from previous years.
- Capital gains
Capital gains are treated as ordinary income subject to corporate income tax.
- Transfer taxes
Apart from corporate tax, no other direct taxes are levied on the transfer of
real property. The transfer is, however, subject to notary and municipal fees.
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
real property is situated.
- 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 pay waste-collection fees.
- Value Added Tax
Transactions with land and lease of property for residential purposes are
exempt from
Value Added Tax (VAT).
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.
IMPORTANT!
The above information is not, nor it is intended to be a legal advice. You should consult an attorney for individual advice regarding this matter. Please, double check our Disclaimer section.