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Country - Bulgaria
Taxes
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A. AVAILABLE INVESTMENT STRUCTURE
Which legal structures are available for an investment in real estate in Bulgaria?
Investment in real estate in Bulgaria can be made directly by acquisition of the real estate or indirectly by acquiring shares in a Bulgarian company or partnership holding such asset.
B. TRANSFER TAXES, NOTARY FEES AND OTHER ACQUISITION COSTS
How is the purchase of a real estate asset taxed?
A local tax amounting to 2% of the value of the property is due.
Under certain circumstances VAT (tax rate 20%) might also be applicable on certain types of transactions.
Do any specific rules for transfer taxes apply if the asset is a shopping centre or another asset used for retail activities?
No.
How is the purchase of shares in an SPV holding real estate taxed?
The purchase of shares in an SPV holding real estate is not subject to transfer or sales tax.
Who normally pays the transfer taxes, the buyer or the seller?
The tax is due by the purchaser unless otherwise agreed between the parties.
Are there any other costs relating to the purchase of real estate assets or SPVs?
Acquisition of real estate incurs notary and registration costs.
The notary fee is graded depending on the value of the property, the cap being BGN 3000 (approx. EUR 1500);
The registration fee with the Registry Agency amounts to 0.1% of the value of the property (either the purchase price or the assessment of the real estate for tax purposes by the respective authority, whichever of them is higher).
C. TAXATION OF RUNNING INCOME
How is income generated from the letting of real estate taxed in Bulgaria?
The rental income generated by a non-resident (note legal entities and individual) from letting real estate in Bulgaria is subject to tax of 10%, levied on the gross amount of the income.
How can income generated by investment be transferred to a foreign investor?
The way of transferring the income from investment to the foreign investor shall depend on the structure of the investment, for example if:
- the real estate is held directly by the foreign investor, then the rental income shall pass directly to the investor and shall be subject to a 10% tax; or
- if the foreign investor held the real estate through a Bulgarian company - then the income from the investment could be transferred to the investor in the form of a dividend or liquidation proceeds. Distribution is subject to a 5% withholding tax unless a DTT provides for a lower rate. With respect to dividends payable to shareholders in the EU, exemption from tax could be used subject to the fulfilment of certain conditions.
Are there local taxes on the possession of real estate assets?
The owners of real estate owe annual local tax (between 0.15% and 0.3% of the value for tax purposes) and an annual local waste fee, the amount of the latter determined by the municipal council for each particular municipality.
D. DEPRECIATION
What are the basic rules for the depreciation of real estate assets?
Real estate accounts as a long-term asset. Buildings are subject to depreciation for tax purposes whereas land cannot be depreciated.
Can land be depreciated?
No.
Can participation in an SPV holding real estate be depreciated?
No.
E. VAT
Is the purchase of real estate assets subject to VAT?
Pursuant to Bulgarian legislation the following supplies are VAT exempt:
- transfer of title over plots of land, establishment or transfer of limited property rights to plots of land, as well as its letting out or leasing of such plots of land;
- establishment or transfer of right to construct until the moment of finalising the building as a rough construction. The executed construction and mounting works shall not be included in the right to construct;
- supply of buildings or of parts of them, which are not new (the right to use the respective building has been issued more than five years ago), delivery of terrain, adjacent to them, as well as establishment and transfer of other property rights in them; and
- letting out a building or part of it to individuals not registered as traders for residential purposes.
The supplier may choose to treat the above supplies as VAT taxable and if this is the case it should charge VAT on such supplies.
The following supplies are not VAT exempt and are treated as subject to VAT:
- supplies of regulated plots of land except for the terrain adjacent to buildings, which are not new;
- transfer of title or other property rights as well as letting out equipment, machines, facilities and buildings affixed on the ground or built under its surface;
- transfer of ownership right or other property rights, as well as letting out camping, caravan parks, holiday camps, parking areas and others similar;
- transfer of rights to ownership of terrain adjacent to new buildings, as well as establishment and transfer of other property rights over this terrain.
F. LEVERAGE, THIN CAPITALISATION RULES
Are there rules which limit the deductibility of interest for third party (bank) financing?
Interest deductibility is regulated by thin capitalisation regulations.
Are there thin capitalisation rules in Bulgaria and if so, how do they work?
Bulgarian law provides for 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 (i) interest income received by the given Bulgarian company plus (ii) 75% of its positive EBIT (financial result computed without taking into account interest income and expenses). Should the financial result, excluding interest income and expenses, be a loss, the amount of the tax deductible interest expenses incurred shall be limited up to the amount of the interest income. Interest on bank loans and interest paid under financial lease agreements is subject to thin capitalisation rules only where the arrangement is between related parties, or the loans or leases are guaranteed, secured or extended as per the instruction of a related party. If the interest expenses exceed the calculated deductible portion, then the excess is non-deductible in the current year. This excess is carried forward for a period of five years and can be deducted in these years subject to calculation of the deductible portion described above. Interest costs brought forward from prior years are deducted only after deducting the interest costs incurred in the current year.
The thin capitalisation rule will not apply where, for the relevant tax period if the debt-equity ratio is 3:1 or lower. In such cases, all interest costs are deductible in full. Presently, the debt-equity ratio is calculated as an average weighted value of debt-equity ratios as of 1 January and 31 December of the current year.
Does Bulgaria apply any withholding taxes on interest paid to foreign financing banks or to foreign shareholders?
Any interest to be paid by Bulgarian entities (including permanent establishments of foreing entities in Bulgaria) to foreign entities/individuals is subject to 10% withholding tax, unless a double tax treaty provides for a lower tax rate. This rate is levied 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 case of DTT) following the month in which the interest expense 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 contains conflicting taxation rules and/or tax rates, the provisions of the respective Double Taxation Treaty shall prevail.
G. TAXATION OF CAPITAL GAINS
How are capital gains made on real estate in Bulgaria taxed?
The capital gains from sale of real estate assets is accumulated in the corporate income and is not taxed separately. The corporate income tax in Bulgaria is 10%.
How are capital gains deriving from the sale of shares/interests in a corporate entity taxed in Bulgaria?
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 if there is a Double Taxation Treaty between Bulgaria and the home state of the shareholder, then the provisions of the treaty will prevail.
Are there any rules regarding participation exemptions in Bulgaria?
Bulgaria applies participation exemption with respect to dividends distributed by local resident companies to other Bulgarian resident companies. Such dividends pass through these companies and are subject to a final tax of 5% when distributed to shareholders, which are individuals, non-profit entities or non-resident shareholders. In the case of dividends distributed to non-resident shareholders, the tax could be lower, provided that an effective DTT provides for a lower rate and the domestic procedures for application of a DTT has been completed.
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