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Tax considerations: Part 2

If you are considering an investment in Bulgaria or just a permanent move here, you need to understand what taxes you have to pay. Jonathan White author of “Buying a Property in Bulgaria” takes us through the steps needed to understand the Bulgarian taxation system.


Taxes on the Sale of Property

As a non-resident of Bulgaria

Bulgarian source income of non-residents derived from dividends, interest, capital gains, lease payments, technical service fees and royalties are subject to a withholding tax of between 7 and 10 per cent. The tax rate may be reduced by an applicable double taxation treaty. Dividends distributed by esident companies to resident individuals and non-commercial entities are subject to 7 per cent withholding tax.

Bulgaria, strictly speaking, does not have a capital gains tax as we do in the UK. However, if you are a non-resident of Bulgaria and you sell your Bulgarian property, then you do have to pay this withholding tax. This tax is paid on the difference between the purchase price and the selling price of the property.

However, this does not change the position with respect to the capital gains tax on your worldwide income in your country of residence. For example, as a UK-resident you would still be liable to the capital gains you make on the sale of your property in Bulgaria. The current rate in the UK for the  2008/2009 tax year is 18 per cent. If you are a higher rate tax payer, then this would be taxable at the rate of 40 per cent. This, of course, could be offset against what you have already paid in Bulgaria provided it is within the terms of the double taxation agreement.

Find an accountant in Bulgaria before you buy a property and check what the tax implications are on buying, renting and selling the property (as applicable). These tax regulations are likely to change, so you also need to keep informed of any changes.
Also, in your own country, check with an accountant on the tax implications within your country.

You need to remember that this tax only applies if you purchased a property as a foreign individual and not if you have purchased under a corporate structure. Therefore it generally applies to the majority of apartments (that exclude land). Non-residents are liable only for their income derived from Bulgarian sources.

As a resident of Bulgaria
Bulgarian tax residents are taxed on their worldwide income. Irrespective of their citizenship, individuals are considered Bulgarian tax residents if they have permanent residence in the country (i.e. personal links such as family or a permanent home) or reside in the country for more than 183 days in any 365-day period, in which case the individual becomes a Bulgarian tax resident for the calendar year in which the 183-day period has exceeded.

A resident is not liable to pay any tax on the capital gains from the sale of one property within a financial year. The property must be for the resident’s sole residential use and is not being rented out to tenants. If a tax resident in Bulgaria has owned property for at least five years then the resident is also entitled to sell up to two real estate entities (e.g. land, office, residential dwelling) in a financial year, without incurring any tax liabilities. Otherwise you are taxed according to the income tax regulations,
based on the difference between the purchase price and the selling price.

General Advice

As laws are changing you are advised to check the situation with a solicitor in Bulgaria prior to the sale of your property. I would go as far as suggesting you check these facts even before buying your property so that you have some idea of any future tax liabilities you may incur. As no one can predict the future, it is difficult to know how the next few years will affect the taxation in Bulgaria. The only form of guidance that you can take is to look to the other Eastern European countries that have
recently entered the EU (e.g. Latvia, Estonia, Lithuania etc.) and see what changes they incur. This can then be used at least as some indication of what may follow in other Eastern European countries.

Corporate Tax

Corporate taxation is governed by the Corporate Income Tax Act. In general, business profits are subject to corporate income tax. If you have purchased a property (or land) under a Bulgarian company, then you will have to consider the tax implications on the sale of your property. The corporate tax on profit is currently set at 10 per cent. This means when it comes to selling a property (or land), the government will take 10 per cent of the company taxable profit at the end of the financial year.
The financial year in Bulgaria is equivalent to the calendar year – 1 January to 31 December. Similarly, the tax on your rental income will currently be based on the corporate tax rate of 10 per cent. The tax you pay will be on the company taxable profit on that rental income. Almost every year changes are made in the legislation by the Parliament and the tax rate is also changed.