Bulgarian Tax Review
Under Bulgarian law it is responsibility of the individuals to fill in a tax return each year when they have any taxable income whilst all companies have the obligation to submit annual tax returns each year regardless of their activities. The tax offices in Bulgaria are not always very helpful so you should seek professional assistance.
Local Property Taxes (similar to UK’s Community Charge)
The property tax is paid annually to the local municipality based on property tax evaluation which is determined according to tax criteria and the information provided by the owner in a declaration that is submitted not later than 2 months after the acquisition of the property. Each property has a file with the local tax office which is being updated in case of changes in the state of the property based on owner’s declaration. The tax charged is between 0.1 and 4.5 per mil of the tax evaluation and is set by each municipal council for the particular municipality.
In addition to the property tax you are required to pay a refuge fee which is often higher than the property tax. The rate of the refuge fee is decided by the local municipal council and in some of the smallest villages there might not be such fee. Both taxes come as one bill. The taxes are payable in four instalments and you can receive a 5% discount if you pay the bill in full by the end of April.
The property tax of an average centrally located apartment in the bigger cities would rarely exceed 50 euros and for a rural property would not be more than 20 euros per year. The municipal refuge fees would also depend on the location and would not be more than 100 euros per year for an average centrally located apartment in the bigger cities and 30 euros per year in the villages.
Taxes Payable by Non-Resident Individuals from renting and selling a property
Income of non-resident owners (individuals) from lease of real estate is subject to 10% withholding tax in Bulgaria. If the lessee is a Bulgarian legal entity the tax is withheld and remitted to the budget by the lessee on behalf of the non-resident lesser. If the lessee is an individual the tax should be paid by the non-resident owner of the real estate within 30 days as of the date on which the rent has been paid by the lessee.
If you sell your property as an individual non-resident owner you must pay 10% withholding tax on the difference between the selling or tax evaluation whichever is greater and the purchase price. However since January 2007 EU citizens are not required to pay the 10% withholding tax (1) if they sell one residential immovable property, regardless of the date of acquisition of the said property, in any one year and (2) if they sell up to two immovable properties as well as any number of agricultural and forest properties, provided that more than five years have elapsed between the date of acquisition and the date of sale or exchange.
Taxes Payable by Resident Individuals
This is a just brief summary of the complicated laws relating to individual’s income tax. Taxes are paid to the national government. The tax returns must be completed by the middle of April in the year following the year to which they relate. If your total income is subject to any of the permitted exemptions you need not fill a tax return unless you are running a business or are self- employed.
Tax on income from the renting a property.20% of the income from rent go towards costs and the remaining 80% of the income are taxable. The rate of tax is 10%. This tax should be paid up to the 15th of the third month following receipt of the income. If for example the rent is paid on the 2nd of January then the tax should be paid by the 15th March of that year.
Income from sale of property. The tax base for the sale of property is the difference between the selling price and the purchase price reduced with 10% for costs. The income tax payable is 10% of the amount calculated as per above rule.
As for the non-resident individuals there are important exemptions that apply to EU citizens when it comes to selling property that mean you are not required to pay tax if you receive income from the sale of: (1) one residential immovable property if you have owned it for more than three years; (2) up to two immovable properties as well as any number of agricultural and forest properties provided that more than five years have elapsed between the date of acquisition and the date of sale or exchange; (3) property that you have received as an inheritance.
Taxes on the employment income are payable by the employer who is responsibile to deduct the income tax and pay it to the government on a monthly basis. This tax is paid together with the social and health insurance payments. The tax rate is10% based on the income reduced by any social payment made.
Taxes Payable by Companies
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.
The rate of corporate tax is 10%. The tax is levied on the basis of the profit of the company as per its profit and loss account, adjusted with certain non-deductible items. After-tax profit of the Bulgarian company may be distributed as a dividend to the shareholder/s; alternatively these profits can remain within the company.
If the money from profit is taken out of the company it is done so as dividends. As per the Corporate Income Tax Act dividends are subject to 5% withholding tax in Bulgaria. Withholding tax will not be due in Bulgaria in the situation where the shareholders in the Bulgarian company are tax residents of an EU country and:
- The shareholders are not considered tax residents of a third state on the grounds of a Double Tax Treaty;
- The shareholders 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 15% of the shares in the Bulgarian company distributing the dividends for an interrupted period of at least two years.
Most people register a company simply to own a property in Bulgaria and have no interest in maintaining any links with Bulgaria once they have sold their property. In this instances when you come to sell your property you can either sell the asset (i.e. the property) and then liquidate your company or you can sell the shares in the company to the buyer. The price of the shares would of course reflect the price that you want to sell the property for. If you are intending to continue some activities in Bulgaria then you should not liquidate your company when you sell any of its assets. If you do liquidate your company you will be required to pay profit and dividend tax as outlined above.
Value Added Tax
The current rate of the Value Added Tax is 20%. If you buy a property as an individual or as a company from a VAT registered company you will have to pay 20% VAT and the seller then passes on this VAT to the government.
Companies are obliged to register for VAT if the value of their sales is equal or grater than BGN 50,000 in any 12-month period but a company can choose to register even with nil revenue. Once a company becomes VAT-registered it is obliged to charge 20% VAT on all taxable deals. The company should prepare and file monthly VAT ledgers on which bases the tax liability is determined. The tax is due by the 14th of the following month.
VAT charged to the buyer of the real estate will not be recoverable at the point of purchase unless the buyer is registered for VAT. However, the above VAT may be recovered by the buyer 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 owned by the buyer at the date of their VAT registration.
Bulgaria has Double Taxation Agreements with most of the European countries including the UK. If, for example, your income is chargeable to tax in Bulgaria and in the UK, a double charge is prevented by one of the following exempting the income from tax in one of the countries or allowing a credit in Bulgaria or in the UK for the tax paid in the other country on the same income. In any case it might be useful to familiarise yourselves with the treaty relevant to your domicile and Bulgaria in order to avoid future problems.
Prior to joining the EU in 2007 the general consensus was that you were better off owning a property through a company because the tax levels were lower than owning as an individual. The tax levels now depend on whether you are tax resident in Bulgaria. If you are resident and expect to receive constant income from your property through rent you could be better off registering a company since the tax rate for companies is lower than residential individual tax persons. If you are non-resident as an individual (if possible) you are probably better off buying as an individual since the tax levels are comparable but you now have the added bonus of being able to sell one property per year without tax.