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Risks of Joint Property Purchases

Friends and family often pitch in together in order to buy that dream property here in Bulgaria. This way they can afford a larger property, often in a better location or in better condition, maybe with a swimming pool - even perhaps run a business together.

But what are the risks in grouping together with others to buy a property through a Bulgarian company or run a business if one of the shareholders dies?

This is an important and often over-looked question and one which deserves serious consideration. There would be nothing worse than to be in this position and have to deal with Bulgarian legal issues which were not understood or explained and indeed which may come as a total shock at a time of such sadness and stress.

There are likely to be two possibilities for most people, those who are resident in the UK and those who are resident in Bulgaria - both need thought and an understanding of the potential situation you may be left in.

Shareholders of a BG company who are resident in the UK

Often, a group or family, having bought a holiday home in Bulgaria are still resident in the UK or elsewhere and believe they are ‘safe’ in the knowledge that they are under their home country legislation. Whilst this is true, you need to remember that a Bulgarian company is a Bulgarian entity. Thus, Bulgarian Commercial Law applies to that company, no matter where the shareholders themselves reside.

Whilst you might have a will to cover inheritance on your death, what happens with the company?

In the case of the death of one of the shareholders the deceased’s shares of the company pass in accordance with the inheritance law of the country in which they were resident. Therefore, for example, if the deceased was living in the UK, UK inheritance law would apply.

However, the heirs who receive the shares of the Bulgarian company must then follow Bulgarian Commercial Law to become shareholders of that company. Despite the heir succeeding to the shares, the heir has to apply to the General Assembly of the Shareholders to be accepted as a member of the company - the heir does not have automatic entitlement to becoming a member of the company.

Two important factors: One, this application can be accepted or rejected by the other shareholders and two, if the application is rejected by the other shareholders they are only obliged to pay to the heir a ‘liquidation quote’. This is the value of the shares according to the Balance Sheet.

To try and put this in practical terms, let’s take a look at a hypothetical (but likely) situation which could happen.

Imagine a BG company has been established jointly by three people. All the shareholders reside in the UK. The BG company goes on to purchase some properties. When buying they do not declare the real price on the final notary deeds. They buy the properties at a total real price of 240,000 euros, but on the deeds the total is only 60,000 euros - and it is this price which is shown on the Balance Sheet. One of our three friends dies. His heir is his only son who, under UK law, inherits his father’s shares in the company. Because the company comes under Bulgarian Commercial Law, at this stage the son has to apply to the remaining shareholders to be accepted as a member of the company. The two shareholders reject his application and are only obliged to pay the son the value of his inherited shares as represented on the Balance Sheet.

In this situation, the son is only entitled to 20,000 euros, whereas he should have been entitled to 80,000 euros had the real value been on the Balance Sheet - totally losing out on 60,000 euros.

Similarly, many businesses, for various reasons wish to keep their Balance Sheet as low as possible. But, again, this could detrimentally affect the position of an heir.

 

Shareholders of a BG company who are resident in Bulgaria

In this case, where the shareholders of the Bulgarian company reside permanently in Bulgaria, then both Bulgarian inheritance commercial law apply. This means that the deceased’s shares pass in accordance with normal Bulgarian inheritance law because the deceased was resident in Bulgaria, then the heirs follow Bulgarian Commercial Law to become shareholders.

Wills have been uncommon in Bulgaria although it is perfectly possible to make one, indeed anyone over 18 and of sound mind can make a will to dispose of their estate. However, if a will endeavours to dispose of the 'fair shares' of certain heirs, it can be contested.

What is the ‘fair shares of certain heirs’?

Under Bulgarian inheritance law the estate passes to the heirs as laid down by the Bulgarian Parliament. The order of priority is based largely on the closeness of the family links (blood ties) with the deceased. The order is:

First Level - children (whether adopted or legitimate), if none then

Second Level - parents surviving, if none then

Third Level - brothers and sisters of whole and half blood and grandparents or further ascendants, if none then

Fourth Level - uncles and aunts of the whole and half blood and their offspring

Note: A surviving spouse is also the legal heir of the deceased. The spouse inherits together with the heirs from the first to the third level (therefore sharing with any children, if no children then sharing with the next level and so on). If there is a surviving spouse and the only other heirs are from the fourth level, then the spouse succeeds to the whole of the estate.

This list is the ‘fair shares of heirs’. If a will tries to pass all of the deceased’s estate to, say the surviving spouse, yet there are surviving children from the deceased (even from a previous marriage), then those children can contest the will, bringing an action for the restitution of their fair shares. One can imagine the potential for disaster.

 

Families and friends are funny things and relationships between both can change at any time. Nothing can compare with correct legal advice from an independent lawyer who will go through everything with you and take into consideration your personal wishes and individual circumstances - a bit of money spent on this now could save a lot of heartache later.

GPNG Law Firm, Sofia, Bulgaria

www.gpng-law.org

 

Quest Bulgaria strongly recommend you take professional advice with regard to wills and inheritance in Bulgaria.