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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. 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 thereto 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 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.
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.
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