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Have You Bought Yourself a Bulgarian Tax Nightmare?

or

“Have You Done it Right?”

I have little or no doubt that, at least, some of you who are about to read this will experience “some concerns” – maybe that is a masterpiece of British understatement!

Bulgarian people are very friendly. They say they will help you. They smile and you trust them with your money. They like this and take your money. Some of them take you for a ride as well – just as a bonus. You may well think that, by not telling you about what you will meet when you sell the property you are buying, or have already bought, they are doing just that.

For a long time, we have been stressing the need to make sure that all your contracts and agreements are in writing. Now I am going to tell the plain unadorned truth as to why this is essential and why a high proportion of foreign owners of Bulgarian real estate are going to pay a lot of Capital Gains Tax (CGT) when they sell.

We are going to start at the beginning. This is when you buy a property.

The Notary Act Valuation

You will have been told that, in Bulgaria, it is common practice for the Seller to fix the valuation that is to appear in the Notary Act. This is true – it is. It is also true that, if this is the Government Valuation or anything less than the actual price you are paying it will save you money on Notary Fees and Land Registration Fees.

What they may NOT tell you is that, for this small saving, you are probably buying yourselves a tax nightmare which will not become apparent until you come to sell.

The truth is that the declared value in your Notary Act forms the base price for all subsequent CGT computations.

Lesson No.1

By law neither of the parties can dictate what amount should be listed in the final deed. This is a matter of agreement before the preliminary contract is signed. If nothing has been mentioned in the preliminary contract then you can go before the Notary and insist on the real price, according to the preliminary contract being entered as the valuation.

I have read that which many people have written on the newsgroups complaining bitterly about developers who will not do this. Read the contract and, if there is nothing in it to the contrary, insist on the full price being entered on the Act. You may have terrible trouble later as you will find out.

If the Seller is not a company but a Bulgarian national and an individual, he or she is entitled to one tax free deal every calendar year. This also applies to multiple individual sellers and this means that it really does not matter to them what valuation is put in the Notary Act.

You know full well that you (or your personal representatives) will sell the property sooner or later. You also know that, overall, property prices rise – and have already risen. So this is the time to take advantage of any individual exemption the seller has and to ask for a much higher valuation to be entered in the Notary Act. After all it’s no skin off the seller’s nose because he won’t pay any tax anyway but you will.

It may cost you more in Notary fees, Stamp Duty and Land Registration fees when you buy but, with CGT at 10 per cent and Stamp Duty at only 2 per cent, this could save you a great deal later.

The Charge to CGT

As we have said, Capital Gains Tax is charged at 10 per cent of the difference between the stated valuation in your Notary Act and the stated valuation in the Notary Act when the property is sold.

There are allowances. There can be deducted, from the amount on which the charge to tax is calculated, certain expenses (allowances) such as:

In this way, the amount to be taxed can be reduced.

Lesson No. 3

How many of you were told that “building this” or “changing that” was not a problem? How many of you accepted the assurance that “just send the money and we will get your work done”?

Apart from the fact that, no doubt, many of you may have been cheated with the work not being done properly or not done at all and then finding you had no recourse whatsoever, if you don’t have a contract and proper receipts for materials, you ain’t going to get your CGT allowances.

Just like in the UK, cash deals are done so that the contractor does not pay tax. Taking this course means that, later, you will have to pay the full rate. But, hey, don’t worry, this only means that you will have to pay another 10 per cent on top of what you have already paid PLUS the increase in the value of the property any natural inflationary increases in value as well!

Always have a contract. Always get the receipts for building materials (all the material should be bought in your company’s name and quote the company’s number(s). Without these a major element of your allowances will have disappeared … for ever!

If you do not have proper contracts, receipts or “facturi”, you will NOT be able to set off the costs against the amount to be charged to CGT.

Consequential Tax Implications

If you think it stops there – think on.

Once your company has made a sale then, according to Bulgarian Law, “it has traded” and then becomes exposed to the full blast of BG tax law. There is no distinction in Bulgarian tax law (as there is in the UK) between profits arising from a trade or business and a Capital Gain.

The “annual return” which is prepared each year for your company and sent into the Tax Office is basically a confirmation that your company has not traded. The moment that your company sells a property it is deemed to have traded. This triggers a momentous sequence of events.

Lesson No. 4

Having “made a profit” in one tax year, it is irrefutably presumed that you will do the same again next year. The presumption is that, if there is a taxable event in one year and you have to pay tax, then the company will do at least the same amount of turnover in the following year.

The Tax authorities will, therefore, demand, in advance, at least the same amount of tax payable in the current year by reason of your sale on account of the next succeeding year. They are quite reasonable about this – you only have to pay by monthly instalments!

Of course, there is a refund if there are no other sales but the advance tax must be paid first.

Lesson No. 5

The threshold for VAT registration in Bulgaria is 50,000 BGN. Please do not think in UK terms. The money you receive through your company on the sale is regarded as TURNOVER as well as a gain / income.

With the Lev tied to the Euro at around 1.96 Leva to the Euros, you can see that the VAT threshold is rapidly reached. You only need to exceed a notary act valuation of around 25,500 Euros (depending on the exchange rate) to trigger the VAT registration mechanism and this is MANDATORY.

The effect is that your company MUST immediately submit itself to VAT registration if the stated value in the Notary Act is over the prescribed limit of 50,000 Leva

Lesson No. 6

You can NEVER have a notary act valuation of LESS than that entered in your own deed.

Lesson No. 7

If your company owns more than one property and you wish to sell it during the period of VAT registration and this means that you have to charge the buyer with VAT (or account for the equivalent amount to the Tax Office) on the sale price.

In effect, if you wish to achieve a sale price of 50,000 Euros clear (but subject to CGT) you would have to sell the property for 60,000 Euros.

This would mean that if, during the time that your Company is registered for VAT, it sells something else then 20% of the sale price will have to be paid to the government in VAT.

Putting this another way, if you had another property for sale and it is on the market for 50,000 Euros, to take account of VAT you would have to sell it for 60,000 (i.e. 50000 + 20%) so as to achieve the 50,000 Euros you originally wanted.

The charge to VAT is in addition to the charge for CGT.

Lesson No. 8

Another problem is that, twice each month during the period of VAT registration, VAT reports have to be submitted in the National Revenue Agency until the Company is deregistered - this can only happen 18 months after initial VAT registration if no other chargeable activity has taken place in the meantime.

This means paying an accountant to do the necessary work until deregistration.

How to Fix the Problem

Sorry. There are ways in which the problems can be mitigated (but not completely overcome) but that information is only for our clients. This research has not been inconsiderable and this article did not write itself.

We are in business. It’s as simple as that. The upside is that we do look after our clients and do tell them the whole story.

Perhaps you should be thinking of changing your property managers from those who have not yet, voluntarily, told you about things like this to a company that would! Visit our Property Management website www.sunseapropertiesbg.com to find out what we can do for you.

Future Articles

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