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Country - Bulgaria
Corporate Vehicles
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INTRODUCTORY NOTE
A. DIRECT INVESTMENT
As mentioned above in the section Sale and Purchase, direct investment in purchase of real estate is subject to limitation under the Bulgarian legislation in force. Currently, foreign citizens do not have the right to acquire land except through legal inheritance but in the latter case it should be transferred to Bulgarian individuals or domiciled in Bulgarian legal entities within three years as of the acquisition date. Foreign citizens and legal entities can acquire ownership on premises and limited real rights (such as right of use/right of construction) over real estate property (land) in Bulgaria.
Due to the accession to the European Union Bulgaria has undertaken the obligation to open its real estate market for purchase of land as a secondary residence by citizens of EU Member states and by legal entities registered under the law of such states within five years of the treaty's entry into force (1 January 2007) and within seven years for purchase of agricultural land, forests or land from the forest fund.
B. INDIRECT INVESTMENT THROUGH CORPORATE VEHICLES
Foreign legal entities and individuals can effectively acquire ownership rights over land through the acquisition of shares in existing Bulgarian companies or through the establishment of such companies.
1. Limited Liability Company (Дружество с Ограничена Отговорност – ООД/OOD)
Minimum capital
BGN 5,000 (approx. EUR 2,500)
Set-up costs
Registration fee BGN 160 and name reservation fee BGN 50 (approx. EUR 105) no translation or legal fees included.
Time required to become operative
Approximately five business days (once all documents have been filed with the Company Registry).
Costs per annum for corporate and accounting compliance
Depends on the size of the company, whether it is VAT registered, its business activity and number of employees.
Corporate governance
The shareholders have considerable influence on corporate governance and control through the General Meeting.
Notwithstanding that, shareholders' liability is limited to the amount of their share contributions.
The General Meeting appoints one or more General Managers to manage and represent the OOD.
With regard to real estate transactions an explicit decision of the General Meeting is mandatory.
Regulatory control
Not applicable.
Taxation of current income in Bulgaria
The corporate income tax is 10% on the net income.
Taxation of distribution of current income to investors
There is a 5% tax on dividends for distribution of income to investors.
With respect to dividends payable to shareholders in the EU, exemption from tax could be used subject to the fulfilment of certain conditions.
Taxation of capital gains
Sale of real estate
The capital gains from the sale of real estate assets of an OOD is accumulated in the corporate income and is not taxed separately.
The acquisition of real estate will be accounted as a long-term asset where, unlike land, buildings can be depreciated for tax purposes.
Sale of a participation in an OOD
If the corporate shareholder is domiciled in Bulgaria or has a permanent business establishment in Bulgaria, the capital gain from the sale of shares/interests is accumulated in the corporate income and is subject to a 10% corporate income tax. The same tax rate applies for individuals not resident in Bulgaria. For citizens of another EU member state, if such income is taxed in the home state, no tax is withheld in Bulgaria.
Please note that in cases where there is a Double Taxation Treaty between Bulgaria and the home state of the shareholder, the provisions of the treaty will prevail.
Real estate transfer tax
Any transfer of real estate right against consideration is subject to a 2% local tax imposed on the higher amount between the property's tax valuation and the negotiated price. According to the law and in the absence of other agreements the transfer tax is due by the purchaser.
Unlike other jurisdictions, if 100% of an OOD holding real estate is transferred the real estate transfer tax is not imposed.
2. Joint stock company (Акционерно Дружество – АД/AD)
Minimum capital
BGN 50,000 (approx. EUR 25,000)
Set-up costs
Registration fee BGN 460 and name reservation fee BGN 50 (approx. EUR 255) no translation or legal fees included.
Time required to become operative
Approximately five business days (once all documents have been filed with the Company Registry).
Costs per annum for corporate and accounting compliance
Depending on the size of the company, whether it is VAT registered, its business activity and number of employees.
Corporate governance
The Bulgarian Commerce Act provides two optional corporate management systems: (i) two tier system (Managing Board and Supervisory Board) and (ii) one tier system (Board of Directors). The Managing Board/the Board of Directors could appoint one or more Executive Members (Executive Directors) to represent the company. Shareholders control over the company is carried out through the General Meeting.
No prior consent or permission is required for disposals of real estate property, unless the assets' value represents more than 50% of the total value of company assets according to the last Annual Financial Report.
Regulatory control
None, unless the company is publicly owned. In this case, the Financial Supervision Commission is the regulatory body.
Taxation of current income in Bulgaria
The corporate income tax is 10% on the net income.
Taxation of distribution of current income to investors
There is a 5% tax on dividends for distribution of income to investors.
With respect to dividends payable to shareholders in the EU, exemption from tax could be used subject to the fulfilment of certain conditions.
Taxation of capital gains
Sale of real estate
The capital gains from the sale of real estate assets is accumulated in the corporate income and is not taxed separately.
The acquisition of real estate will be accounted as a long-term asset where, unlike land, buildings can be depreciated for tax purposes.
Sale of a participation in an AD
If the corporate shareholder is domiciled in Bulgaria or they have a permanent business establishment in Bulgaria, the capital gain from the sale of shares is accumulated in the corporate income and is subject to a 10% corporate income tax. The same tax rate applies for individuals not resident in Bulgaria. For citizens of another EU member state, if such income is taxed in the home state, no tax is withheld in Bulgaria.
Please note that in cases where there is a Double Taxation Treaty between Bulgaria and the home state of the shareholder, the provisions of the treaty will prevail.
C. INDIRECT INVESTMENT THROUGH PARTNERSHIPS
1. Limited Partnership (Командитно Дружество – КД/KD)
The KD is a partnership of at least one partner with unlimited liability and at least one partner with limited liability.
Minimum capital
Not applicable.
Set-up costs
Registration fee BGN 130 and name reservation fee BGN 50 (approx. EUR 90) no translation or legal fees included.
Time required to become operative
Approximately five business days (once all documents have been filed with the Company Registry).
Costs per annum for corporate and accounting compliance
Depending on the size of the company, whether it is VAT registered, its business activity and number of employees.
Corporate governance
The limited partners are entitled to profit only after they have paid the full amount of the contribution arranged in the Articles of Incorporation.
The unlimited partner is by law the managing partner. Limited partners do not have the right to manage and represent the partnership and cannot revoke or stop the execution of an unlimited partner's decision.
Regulatory control
Not applicable.
Taxation of current income in Bulgaria
The corporate income tax is 10% on the net income.
Taxation of distribution of current income to investors
There is a 5% tax on dividends for distribution of income to investors.
With respect to dividends payable to shareholders in the EU, exemption from tax could be used subject to the fulfilment of certain conditions.
Taxation of capital gains
Sale of real estate
The capital gains from the sale of real estate assets is accumulated in the corporate income and is not taxed separately.
The acquisition of real estate will be accounted as a long-term asset where, unlike land, buildings can be depreciated for tax purposes.
Sale of a participation in a KD
If the corporate shareholder is domiciled in Bulgaria or they have a permanent business establishment in Bulgaria, the capital gain from the sale of shares/interests is accumulated in the corporate income and is subject to a 10% corporate income tax. The same tax rate applies for individuals not resident in Bulgaria. For citizens of another EU member state, if such income is taxed in the home state, no tax is withheld in Bulgaria.
Please note that in cases where there is a Double Taxation Treaty between Bulgaria and the home state of the shareholder, the provisions of the treaty will prevail.
2. Limited Partnership with Shares (Командитно Дружество с Акции – КДА/KDA)
The KDA is a partnership with corporate structure which is closer to the joint stock company rather than to the limited partnership. The unlimited partners are the founders of the partnership approving the first shareholders (limited partners). There should be a minimum of three shareholders.
Minimum capital
BGN 50,000 (approx. EUR 25,000)
Set-up costs
Registration fee BGN 460 and name reservation fee BGN 50 (approx. EUR 255) no translation or legal fees included.
Time required to become operative
Approximately five business days (once all documents have been filed with the Company Registry).
Costs per annum for corporate and accounting compliance
Depending on the size of the company, whether it is VAT registered, its business activity and number of employees.
Corporate governance
The corporate governance of a KDA is the same as a joint stock company with a one tier management system. The unlimited partners are by law the managing partners and members of the Board of Directors.
Only the limited partners (shareholders) have voting rights. The unlimited partners may also own shares but they are not entitled to vote. The competence of the General Meeting is arranged for in the Articles of Incorporation. The Articles of Incorporation are adopted by the unlimited partners.
Regulatory control
Not applicable.
Taxation of current income in Bulgaria
The corporate income tax is 10% on the net income.
Taxation of distribution of current income to investors
There is a 5% tax on dividends for distribution of income to investors.
With respect to dividends payable to shareholders in the EU, exemption from tax could be used subject to the fulfilment of certain conditions.
Taxation of capital gains
Sale of real estate
The capital gains from the sale of real estate assets is accumulated in the corporate income and is not taxed separately.
The acquisition of real estate will be accounted as a long-term asset where, unlike land, buildings can be depreciated for tax purposes.
Sale of a participation in a KDA
If the corporate shareholder is domiciled in Bulgaria or it has a permanent business establishment in Bulgaria, the capital gain from the sale of shares/interests is accumulated in the corporate income and is subject to a 10% corporate income tax. The same tax rate applies for individuals not resident in Bulgaria. For citizens of another EU member state, if such income is taxed in the home state, no tax is withheld in Bulgaria.
Please note that in cases where there is a Double Taxation Treaty between Bulgaria and the home state of the shareholder, the provisions of the treaty will prevail.
3. Unlimited partnership (Събирателно дружество – СД/ SD)
The SD is a partnership of at least two partners with unlimited liability.
Minimum capital
Not applicable.
Set-up costs
Registration fee BGN 130 and name reservation fee BGN 50 (approx. EUR 90) no translation or legal fees included.
Time required to become operative
Approximately five business days (once all documents have been filed with the Company Registry).
Costs per annum for corporate and accounting compliance
Depending on the size of the company, whether it is VAT registered, its business activity and number of employees.
Corporate governance
The partners are jointly and unlimitedly liable for the obligations of the partnership.
Each of the partners is by law entitled with management rights, unless the Articles of Incorporation provide that the company management shall be assigned to one or more of the partners or to a third party.
According to the provisions of the Commerce Act the partners should unanimously take decisions on disposal of real estate property.
Regulatory control
Not applicable.
Taxation of current income in Bulgaria
The corporate income tax is 10% on the net income.
Taxation of distribution of current income to investors
There is a 5% tax on dividends for distribution of income to investors.
With respect to dividends payable to shareholders in the EU, exemption from tax could be used subject to the fulfilment of certain conditions.
Taxation of capital gains
Sale of real estate
The capital gains from the sale of real estate assets is accumulated in the corporate income and is not taxed separately.
The acquisition of real estate will be accounted as a long-term asset where, unlike land, buildings can be depreciated for tax purposes.
D. INDIRECT INVESTMENT THROUGH COLLECTIVE INVESTMENT VEHICLES
1. Special Investment Purpose Company (акционерно дружество със специална инвестиционна цел - АДСИЦ /ADSIC)
The ADSIC is a joint stock company pooling assets invested in real estate property or receivables. The ADSIC is a public company issuing dematerialised shares.
Minimum capital
A minimum of BGN 500,000 (approximately EUR 250,000), paid-up in full. At least 30% of the share capital should be subscribed by an institutional investor (a bank, an investment company, an insurance company or another company with a subject of activity including acquisition, holding and transfer of securities).
At the establishment of the ADSIC the incorporation meeting should adopt a resolution on initial share capital increase through public offering with a minimum 30% of the subscribed capital.
Set-up costs
The official costs for incorporation of an ADSIC amount to approximately BGN 3600 licence fee, BGN 460 incorporation and BGN 50 for name reservation (approx. EUR 2055) including the licence fee (no investment intermediary, bank, legal or translation fees included).
The official fee for permission of initial share capital increase through public offering is between BGN 600 and BGN 5,000 (EUR 300 - 2,500).
Time required to become operative
Approximately three months including the time for obtaining a licence.
It should be noted that not later than six months as of the date of registering with the Company Register the Board of Directors should apply for a licence to the Financial Supervision Commission.
Costs per annum for corporate and accounting compliance
The official annual fee for financial supervision is 30% on the licence fee.
Value of real estate must be assessed once a year by one or more independent experts.
Corporate governance
An ADSIC should be a joint stock company organised according to the one-tier management system. The company management body is the Board of Directors. The members should meet special qualification requirements.
The shareholders founding the Company should be at the maximum of 50.
There must be no shares with more than one voting right.
An ADSIC should hold a licence issued by the Financial Supervision Commission in accordance with the Special Purpose Investment Companies Act.
Regulatory control
The competent authority is the Financial Supervision Commission.
Taxation of current income in Bulgaria
There is no taxation of income.
Taxation of distribution of current income to investors
The ADSIC must distribute annually at least 90% of its income to the investors.
There is a 5% tax on dividends for the distribution of income to investors.
Taxation of capital gains
Capital gains is accumulated in the company income and is not subject to taxation as well.
Sale of participation
Individuals' capital gains from sale of shares in ADSIC is not taxed.
E. RULES OF LEVERAGE
Are there any rules which limit the deductibility of interest for third party (bank) financing?
Thin capitalisation and transfer pricing regulations regulate interest deductibility.
1. Thin capitalisation rules and transfer pricing
Bulgarian law provides a "thin capitalisation" rule, under which the amount of the tax-deductible portion of interest paid on loans taken from shareholders or third parties is limited to the total amount of interest income received by the given Bulgarian company plus 75% of its positive financial result (computed without taking into account interest income and expenses). Should the financial result, excluding interest income and expenses, be a loss, none of the interest expenses incurred in the given year will be tax deductible.
Interest on bank loans and interest paid under financial lease agreements are subject to thin capitalisation rules only where the arrangement is between related parties.
Bulgarian tax law envisages general transfer pricing rules, which allow the tax authorities to adjust for tax purposes the financial result of the taxpayers if the tax authorities consider that certain supplies are carried out in deviation with the market conditions and result in tax avoidance. The transfer pricing rules shall apply not only to transactions between related entities. Transactions between non-related entities could also be subject to transfer pricing adjustments. In particular, where interest rates applied between related parties deviate from the arm's length rates and this results in a reduction of the financial results (or a loss) for the relevant tax period, the financial results of the taxpayer will need to be adjusted for tax purposes to the level which would have been achieved had arm's length interest rates been applied.
Hidden distribution of profit - interest cost incurred on loans may be disallowed for tax deduction even in cases when the loan is extended at market conditions, provided that certain conditions are in place (i.e. the equity of the debtor is lower than the amount of the loan, the loan is not with a fixed term, etc.). Expenses classified as "hidden distribution of profit" are deemed dividend for tax purposes.
2. Withholding tax on interest
Any interest to be paid by Bulgarian entities/individuals (including foreign entities permanently established in Bulgaria) to foreign entities/individuals is subject to 10% withholding tax. This rate accrues on the gross amount of the interest. A Borrower is required to withhold the tax and pay it not later than the end of the month (three months in the case of the double tax treaty) following the month in which it accrued, unless an application for withholding tax exemption is filed with the tax authorities and an exemption clearance is obtained prior to the expiry of the term for payment.
In the event that a Double Taxation Treaty (DTT) contains conflicting taxation rules and/or tax rates, the provisions of the respective Double Taxation Treaty shall prevail.
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