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Simeon Grigorov |
During the past years, an increasing trend for real estate investments in the SEE region has been noted. Throughout the region there are many investment opportunities for foreign investors, including Bulgaria, which has many attractive features. In addition to the country's central location in the Balkans and its excellent touristic destinations (both ski and sea resorts), the real estate prices are by far lower than other destinations in Europe. In fact, the prices on the real estate market have additionally dropped in 2009 with 30% to 50% compared to 2008 which made the county even more attractive for foreign investors.
The Bulgarian legislation is welcoming to foreign investors, both physical and legal persons. Foreign investors can freely purchase directly any Bulgarian property – apartment, house, building or construction. Nevertheless, pursuant to restrictive provisions in the constitution, foreigners cannot directly acquire land unless under the form of legal succession in which case they would be obliged to transfer the respective land in a term of three years.
The restriction does not apply when the land is acquired by a company which is established in Bulgaria even if the ultimate ownership is entirely held by foreign individuals or companies. Therefore, foreign investors usually choose to incorporate a company in Bulgaria through which they acquire property or land. The incorporation procedure is relatively fast (three to five days from the date when all incorporation documents are submitted with the Entry Agency). In addition, due to recent legislative amendments in the Commercial Act the incorporation of the limited liability company, which is the most common business form in Bulgaria, only requires initial capital of BGN2 ($1.30).
In terms of taxation, Bulgarian legislation is also favourable. The real estate tax payable annually by the property owner is rated between 0.1% to 2.5% a mile on the tax valuation of the property while transfer tax is rated between 0.1% to 3% on the valuation of the transferred property. The transfer of "new buildings", that is, buildings which are at the stage of "rough construction" or buildings for which 60 months have not expired since the date on which a permission for utilisation has been issued, are also VAT exempt. The transfer/ sale of other buildings are subject to a 20% rate of VAT.
Tax obligations are always a crucial issue for foreign investors not only when it comes to acquisition of a property but also when it comes to its subsequent disposal. Therefore, investors often look for possible solutions to minimise tax burdens related to exit routes from property investments. The sale of shares lead to an indirect sale of real estate is very popular alternative which eliminates transfer taxes and VAT payments (for old buildings). Nevertheless, the transferee shall be obliged to pay a corporate tax on the received gain, i.e. a 10% flat rate shall apply. For tax efficiency reasons foreign investors often consider the option of acquiring and subsequently transferring a property through a Bulgarian company which is ultimately held by a foreign company, a special purpose vehicle (SPV) established in jurisdiction providing for more favorable taxation with which Bulgaria has concluded a double tax treaty.
One of the preferred jurisdictions used for real estate investments in Bulgaria is Cyprus due to its favourable domestic legislation and respectively its DTT with Bulgaria. From a Cyprus perspective the gains from the sale of shares are exempt from corporation tax. An exemption from capital gains tax is also available unless the company the shares of which are sold holds Cypriot immovable property.
In the course of tax structuring, the provisions of the double tax treaty between the two countries should be taken into account, as it determines that "gains derived by a resident of a Contracting State from the alienation of immovable property situated in other Contracting State may be taxed in that other State".
Accordingly the benefit of the Cyprus legislation can be extended where a double layer structure is implemented in which case the first Cyprus company can proceed into the alienation of shares of the second Cyprus company the gains of which will not be taxable in Bulgaria but Cyprus instead.
Despite the difficulties which the Bulgarian real estate sector experienced in the last year as result of the difficult economic times, the country still has much to offer to its foreign investors. Analysts already predict recovery of the Bulgarian property market in the second half of 2010, which means that potential investors should be thinking of purchasing property in Bulgaria sooner rather than later.
Simeon Grigorov (simeon.grigorov@eurofast.net)
