Bulgaria - Income Taxes and Tax Laws in general

In Bulgaria income of any individual is subject to a flat income tax rate of 10% in 2008. Exemptions are granted to taxpayers with specific types of income. The standard rate of tax for a Bulgarian corporate body in 2008 is 10% fixed.

Income Tax for an Individual

* An individual in Bulgaria is liable for tax on his income as an employee as well as on income as a self-employed person. In the case of an individual who answers the test of a "permanent resident" of Bulgaria, tax will be calculated both on his income earned in Bulgaria and overseas.
* A foreign resident who is employed in Bulgaria pays tax only on his income in Bulgaria.
* To be considered a Bulgarian resident, the requirements must be met of residency in Bulgaria of at least 183 days in any calendar year, and occasionally also if residency is less than 183 days, if the individual has a home in Bulgaria that is his main residence, he will be considered a Bulgarian resident.
* An employer is obligated to deduct the income tax payable as well as national insurance, immediately each month from a salary paid to an employee.
* Certain payments are deducted from taxable income as detailed below.

Corporate Tax

* In 2008, standard corporate tax in Bulgaria is 10%.
* A special tax rate is applicable for companies dealing in insurance as well as companies engaged in games of chance and gambling.

Types of Corporations

In Bulgaria, according to the Commercial Code exist the following forms of incorporation:

A limited liability company (with the suffix OOD)
- At least 1 shareholder or more is required to set up the company. The shareholders may be individuals or companies.
- The minimum share capital is BGL 5,000, with the minimum nominal value of BGL 10 a share.
- At least 70% of the capital must be paid up before registration.
- The owners of the company are liable only for the amount of capital invested.
- An annual shareholders' meeting must be convened at least once a year.
- A director must be appointed for the company.

A limited liability company with a single shareholder (with the suffix EOOD)
- This is an OOD company owned by one individual, who may be a foreign resident.
- The single shareholder may serve also as a director of the company.

A consolidated company also known as Joint stock companies and Public limited companies (with the suffix AD)
- At least 1 shareholder or more is required to set up the company.
- The minimum share value is BGL 1.
- The company must have a minimum registered capital of BGL 50,000. For banks, the minimum capital requirements are BGL 10 million.
- At least 25% of the registered capital must be paid up before registration.
- The company is managed by a board of directors, or at two levels by 'a supervisory board' and a 'board of directors'.

A consolidated company with a single shareholder (with the suffix EAD)
- The company is owned and controlled by a single shareholder.
- It is compulsory to file an annual balance sheet with the tax authorities.

Capital gains

In Bulgaria, capital gains tax is paid by an individual on the sale of real estate or work vehicles such as planes or cars on the difference between the sale price and the higher of two calculations - the market price of the asset sold, or the cost of purchase linked to the index.
An individual who sells movable asset pays tax on the difference between the sale price and the cost of the asset sold on adjusting the cost to the rate of inflation. Capital gains tax for companies in Bulgaria is added to the regular income.
The tax rate for dividend income and income from sale of shares is 5% for individuals.

Reporting data and payment

* The tax year in Bulgaria is the year ending on December 31.
* A limited company files an annual report by March 31. An individual must file an annual report by April 15.
* Companies that finished the previous year with a profit, pay 12 monthly advance payments in the following year. New companies make 4 quarterly advance payments.

Deduction of taxes at the source

* Taxation of Employee
An employer is obligated to deduct tax at source from an employee and to make additional contributions to social security.

* Bulgaria Social Security
In 2008 as regards to salaried employees, the social security rates are:
Employer around 20.4%.
Employee around 13.3%.

Other deductions

Tax must be deducted at source from the following payments on the basis of the following:

- Dividend - The standard deduction is 5% (0% from dividend paid to EU companies).
- Interest - the standard rate of tax deducted at source - 10%.
- Royalties - the standard rate of tax deducted at source - 10%.

Current information for the issuance of visas and ruling of the visa regime requirements in Bulgaria

Current information about the legalization of the invitation-declarations for issuance of visa for citizens, address registration of citizens from non-EU member countries, residence permit on the territory of Bulgaria for citizens from EU member countries, and the conditions upon which foreign citizens from non-EU member countries may enter, stay and leave Bulgaria.

Legalization of the invitation-declaration for issuance of visa for citizens from non-EU member countries.

According to the requirements of the Ordinance for the conditions and the order for the issuance of visas and ruling of the visa regime, the legislation of the invitation-declarations is made from the “Migration” directorate and the regional structures of the Police and the regional Police directorates.
The invitation-declarations by which foreign citizens could be invited for short term visits in the country are several types:
- Invitation-declaration from a person that invite foreign person for private visit on the territory of Bulgaria;
- Invitation-declaration from a person and/or legal entity that is having an activity according to the Commercial Act that invite foreign person with the purpose of business activities;
- Invitation-declaration from a not for profit legal entity that invite foreign person with the purpose of business activities;
- Invitation-declaration from a legal entity that is foreign representative office registered in Bulgaria that invite foreign person with the purpose of business activities;
Invitation-declaration forms are available in the regional “Migration” directorates. It must be two copies, notarized and represented in front of the regional “Migration” directorates.

Address registration of citizens from non-EU member countries

Once a person enter on the territory of Bulgaria and has passed the border the foreign citizen declare the purpose of its visit and the address where shall stay. On the same way according to the governing law and its requirements the Bulgarian citizen upon which invitation the citizen from non-EU country visit Bulgaria and stay on its premises is obliged in term of five days to inform the Migration authorities.
The hotels, hostels, etc. are obliged to register the foreign citizen immediately on a special registry book and this information to be sent to the Migration authorities.

Issuance of certificate for residence permits of citizens from EU member countries

According to the requirements of the Act for the entrance, stay and leaving the territory of Bulgaria by citizens of EU member countries and the members of their families say that for the first three months of their residence did not need a registration procedure. If there is a wish for a longer than three months residence, the person must apply an application form for long term or permanent residence in Bulgaria. On the basis of the respective application form the “Migration” authorities issue a certificate for residence permit.

Issuance of certificate for residence permits of citizens from non-EU member countries

According to the requirements of the Act for foreigners in Bulgaria a person that shall stay longer than three months on the territory of Bulgaria must have visa type “D” which is issued by the diplomatic bodies and the consular authorities of Bulgaria in their countries of origin upon representation of required documents according to the requirements explained in art. 24 and art. 25. After obtaining the visa the person must apply an application form for the issuance of long term residence permit in front of “Migration” directorate together with the same documents with which the applied for the issuance of the visa.

What is the meaning and the usage of Act 16 - Permit for use of a building

Act 16 known as Use permit (Permit for use) for buildings.

To be issued it is needed to exist the following documents and to meet their criteria:
- Building permit;
- Protocol for assessment of construction line and level;
- Established Act 15 (document that approves the acceptance of the construction, it is a long list of requirements that must be checked and approved);
- Certificate from the Cadastre agency;
- Approved order (acts) book from the constructor (developer);
- Title of deed;
- Contract with the water supplier, heat supplier, gas supplier, electricity suppliers, etc., for the building that proves the building has them all in use.

All the abovementioned documents must be applied to the Municipality if the building is not higher than 15 meters if it is above 15 meters then it must be applied to the DAAG (Governmental Agency for architecture and urbanization). After they are examined then the use permit – Act 16 is issued.
It is issued when all necessary documents are ready and the building is suitable for any use.

Use permit – Act 16, allow the constructor (developer) to transfer the property over the buyer.
After it is received the developer may transfer the ownership of every apartment or the whole building to the buyer.
Act 16 is issued when inspection made by the Municipality or DAAG for the following: how it is build up the whole building, how and is it secured and inspected for all facilities like energy, water, heat and etc. facilities made for the use of the respective building.

Usually if there exist Act 16 then all access roads, electricity, water supply and other facilities that are in use for the owners must be ready before issuance of it. A commission (from administrative body from the Municipality or DAAG) is making a test that shall improve does everything work and is it suitable for use.

General information about Real Estate Investment Funds in Bulgaria - An option for the investors in the Bulgarian Real Estate market.

The history of REITs (Real Estate Investment Fund) dates back to 1880 in the USA. At this time the investors have alleviated the double taxation, as these companies were not liable to tax at the corporate level if the profits were distributed to the shareholders. This tax benefit was abolished in the 30ies of the 20th century and all passive investments were firstly taxed at the corporate level and again subject to personal income tax. In contrast with the companies investing in shares and bonds REITs were not successful in amending this legislation until 1960 when the president Eisenhower reinforces the tax holiday for REITs in their capacity of a transitory unit. With slightly changes this law is preserved till nowadays. Today more than 300 publicly traded companies operate in the United States holding assets of more than USD 300 billion as 2/3 of them are listed on the stock exchanges.

The history of REIT in Bulgaria is shorter. The basics are laid with the enforcement of the Special Investment Purpose Companies Vehicles Act promulgated on 20 May 2003, already amended several times in a way to protect the investors and is in force as of 25th of April 2006. The Bulgarian Parliament considering the described above tax holidays has implemented similar rules and the tax benefits are fully applicable for each REIT duly registered and licensed in Bulgaria.

In order to classify a company as REIT and to benefit from the advantages of a transitory unit exempt from taxation at the corporate level, it has to meet the following requirements:

- Structure of a public limited company;
- Obtain license from the Financial Supervision Commission to perform activity as REIT;
- No limits for transfer of paperless shares;
- Founders could be not more than 50 legal entities;
- Pay out of at least 90 percent of the taxable profit in the form of dividend;
- Minimum 30% of the capital of REIT upon establishment should be subscribed by institutional investor;
- Upon incorporation REIT the meeting of the shareholders must take a decision that the initial increase of capital should be minimum 30%;
- Investment of up to 10% of the capital in the property management company;
- Increase of capital based on art. 197 of the Commercial Act (increase of the capital by way of transforming part from the profit into a capital) is not allowed;
- Exempt from profit tax at the corporate level;
- Tax breaks:
* REITs are exempt from corporate tax.
* No capital gains tax for trading with shares of REITs.
* Dividend tax is 5%, which is 5% lower than the corporate tax for legal entities (i.e. 10%);
- Liquidity – the shares of REITs are among the most liquid on the Bulgarian Stock Exchange – Sofia;
- Unique – REITs provide the opportunity to everybody to invest small amount of money in a diversified real estate portfolio.

Local as well as foreign capitals can secure the investments for the REIT’s market. As a rule REIT are owned by significant number of individuals and large institutional investors including pension funds, insurance companies, banks and mutual funds. The investment purposes of holding shares in REIT are identical to those of investing in any other type of shares – current dividend yield and long term increase of the value of the shares.

The majority of the shares in REIT could be acquired through the stock exchanges as stock exchange brokers undertake the orders. The financial consultants can significantly facilitate the dismantling of the investment perspectives for individual investors. REIT also provides annual and quarterly financial statements, prospectus for public offering of securities and other financial information necessary for the investors.

The investment in REIT also secures diversification of the investment portfolios as the return on investment in REIT is in low correlation with the yield of other securities in other industry sectors.

Permits, Planing, Zoning and Environment

Building permit is issued by the chief architect of the municipality where the land plot is located. If the project where a development shall exist concerns more than one municipality or more than one district, the competent body that shall issue the building permit is the respective district governor or the Minister of regional development and welfare. The documents that must exist and shall be needed for the purpose are:

- drawings of the plots/s;
- project permit;
- development-project design (where applicable);
- technical and work plan;
- visa;
- building permit;
- occupational and operating permit.

Visa is an excerpt from the Detailed development plan (well known in Bulgaria as PUP) of the region where the land is located. It contains data about the land and the surrounding properties, the existing buildings (if there are any) boundaries, height, intensity, density, and other requirements for building in the specified land. The Visa is issued by the chief architect of the municipality where the land is situated within 14 days (according to the requirements of the law, but usually it takes more times). The Visa is valid for six months but the law provides an option for prolonging that term.

Development-project design may be prepared in the following phases:

- conceptual design;
- technical design;
- working design (technical working drawings and details).

The development-project design is subject to approval by the competent administrative bodies. The approved development-project design serves as a ground for the issuance of a building permit. The investor may apply for building permit together with the submission for approval of the development-project design (this procedure is faster but it require all document to be well organized and prepared according to the requirements of the Law on Development of the Territory).

Building permit is issued on the basis of approved development-project design, if it is required. The law stipulates that building permit may also be issued on the basis of approved conceptual design. The term of issuance is seven days after the application form has been deposited. For the purpose of the issuance of building permit in co-owned land the law requires a valid contract executed in a notary deed form between the co-owners. The permit to construct can be issued for the whole building or for different stages or parts of the construction (that is why when you are going to purchase something which is an off-plan project it is required to examine the building permit). Construction works can be undertaken only after issuance of a building permit. The building permit is valid where the construction has been undertaken within three years after the issuance of the building permit and the building is completed as a rough construction within five years after the issuance of the permit. The terms and the relations between the participants in the construction process like investor, contractor, designer, consultant etc., shall be regulated by written contracts. Fees for issuance of the building permit vary depending on the type of the building, the location, the municipality taxes etc.

The development schemes and plans are provided for the function and purposes of the territories. The territories are classified in as follow:

- urban territories;
- territories for agricultural needs;
- woodlands;
- protected territories;
- territories for restoration.

Detailed development plans contain the areas assigned, alignments, building categories, types of construction, infrastructure, communications etc. The mentioned provisions of the detailed development plan shall respond with the standards for the environmental protection according to the statutes related to the environmental protection. Where it concern industrial building, building with specific use etc., that might negatively effect the environment, the investor shall conclude an analysis of the impact to the environment and shall comply with the existing environmental protection legislation (this is the link to NATURA 2000 in Bulgaria http://www.natura2000bg.org/natura/eng/index1.php).

The preliminary contract for purchase of Real Estate according to the Bulgarian legislation - General review

The subject of the Preliminary contract for purchase of Real Estate is the aim of a future transfer of ownership of the respective Real Estate from the seller to the buyer where the later must pay the price upon specified conditions. According to a decision of the Bulgarian High court No. 1023/1998, II civil division, the preliminary contract must content the following minimal requirements in its content: clauses that individualize its subject; the price; the term upon which the buyer shall receive from the seller the Title of deed/Notary deed and the term upon which the buyer shall pay its full price. If all this minimum requirement did not exist in the content of the contract than it is not a contract for preliminary purchase of Real Estate, but only a receipt for a received amount of money.

It is very important before signing the contract each party to know and collect information as much as it is possible for the other party, so to know clearly and better with whom it negotiate and is going to be involved in a contracted relations. Each party must legitimate itself in a manner that shall prove that they as parties to the contract has legal rights to sign it and to care for the obligations that are included in the respective contract.

• In case where the Real Estate is owned by several owners (family members, or individuals) or is going to be purchased by several buyers then all parties must be represented in the contract and the contract must be signed by all of them or by authorized person that has the right to sign it. If this requirement is not fulfilled then there is no a legitimate contract and no transfer of Real Estate shall exist.
• In case where the seller or the buyer is a legal entity then each of the parties must ask the other party to represent a clear, signed and approved minutes from the shareholders or from the general meeting that the person who is going to sign the contract has their permit to go into such a contract.

In the contract it is very important that the respective Real Estate is described fully and in details in a form as it shall exist in the Title of deed/Notary deed.

Usually in the preliminary contracts where there is a payment of a certain amount it must exist a clause that this initial payment is named as "earnest". The Obligations and Contracts Act art. 93, say that if the buyer reject to fulfill his obligation to buy the property, then the seller has the right to keep that amount. The same article also say that if the seller reject to fulfill his obligation to sell, the the buyer has the right to claim and to receive the "earnest" in double. That is why my personal advice is when there in the contract has a clause about the "earnest" also to be included art. 93 from the Obligations and Contracts Act. It is also very important in the contract to be included a clause which says that or something similar to: this contract shall play the role of a receipt that prove that the earnest is paid by the buyer and received by the seller.

The preliminary contract for purchase of Real Estate must be in written form according to the rules of the Bulgarian law especially where the respective contract is for Real Estate. The law did not require the contract to be notarized, but for your security although you must pay a tax for the notarization of the signatures of the contract it will be better if you sign the contract in front of the notary. This safeguard shall help the buyer to have a quicker action in front of the court if the seller did not sell and the buyer claim for the earnest (ask your lawyer to explain you the meaning of art. 417 from the Civil Procedure Code). In connection to that it is also important for you to ask your lawyer and to explain fully with given examples the legal meaning of art. 362 from the Civil Procedure Code which is connected with art. 19 from the Obligations and Contracts Act that regulates the preliminary contracts.

The main question: "Did the preliminary contract for purchase of Real Estate guarantee that the buyer shall become the owner of the property - the Real Estate", The clear answer is NO. This is so because according to the Bulgarian legislation any deals that concern Real Estate transfer of rights and ownership must be made upon Title of deed/Notary deed form, which is well explained and for which reason you must use a lawyer that shall explain you all that in details and to tell you how you will be protected from any future problems. So, if I have to generalize all that it must be known that the preliminary contract for the purchase of the Real Estate did not make the buyer owner of the respective property. The ownership must be approved in front of the court that shall come with a final decision to establish who is the owner. If the contract is made fully and precise and one of the parties did not agree to go and to sign the Title of deed/Notary deed then the seller or the buyer has the right to break the preliminary contract or to ask the Region court (the region where the property is situated) to establish the preliminary contract as final. Have in mind that this rights can be used in term of 5 /five/ years from the signing of the preliminary contract and only in case if in the contract is not mentioned other short term.

Usually the risk is for the buyer - shall he receive the ownership rights over the Real Estate or shall he receive back the money he paid in advance. Because of the fact that the respective contract usually is not notarized the buyer must make a proper research about the status of the Real Estate and the rights of the seller to sell legitimately. That is why if you did not use the services of a lawyer who shall examine precisely the property you must notarize the contract and to ask the notary for support to examine for you carefully the property and the represented documents.

A must to know before to purchase Real Estate

I recommend when you are planning to purchase a property (Real Estate) in Bulgaria to make or arrange for your own purpose before the purchase itself a complete legal due diligence of the targeted property that shall verify at least the following facts:

1. The seller (private body/es or the legal entity) hold a free and clear, valid and certified Tittle of deed/Notary deed. The buyer (private body/es or the legal entity) must be verified that the seller and the predecessors of the specified property have been the valid and only owners of the respective property.

2. It must be made an investigation about the respective property concerning that there are no registered mortgages, encumbrances, pledges, etc.

3. There are no any registered or non registered rental agreement, limited property rights established in favor of third parties, there are no any court restitution, no injunction or claim and complaint in front of the court.

4. All governmental and municipalities taxes to the respective property are paid.

5. If the seller authorized a third party by Power of attorney (POA), the POA must be notarized, must have the same details about the property as they are described in the Title of deed, the price, term and the conditions upon which the authorized person may sell the property. Upon all this information ask your lawyer to examine how it is issued, how it is legalized and is it trustfull one.

6. The plan of the respected property (if there is any). Important - the plan did not approve the ownership of the property!

7. If the seller is a legal entity, a proper investigation to that company is a must in front of the Company registrar (It is strongly recommended to ask for Letter of current status and Letter for existence of insolvency procedure).

8. If the respective property is a family ownership, than for the purpose of the sale it is required to have the agreement from the other party.

Next time I will discuss the Preliminary contract for purchase of Real Estate

The begining...

This is just the beginning of something that might be interesting for all newcomers in Bulgaria, and also for Bulgarians that needs some legal support or want to know something for the investments in Bulgarian properties and stocks /shares/ from the Bulgarian Stock Exchange (http://www.bse-sofia.bg/?site_lang=en&page=main) and the connected legal issues.

1. Here you may make your search for lawyers that are members of the Bulgarian law societies and has the permit to practice: http://www.lex.bg/sprav.php?lang=eng&op=adv

2. Here is the databases of the the Bulgarian notaries: http://www.lex.bg/sprav.php?lang=eng&op=not

3. Here is the web site of the Bulgarian association of the licensed Investment intermediaries (sorry but this site is only in Bulgarian :-), click on ЧЛЕНОВЕ which means MEMBERS, most of their sites support English language): http://www.balip.com/

4. The biggest property portal in Bulgaria where you may make your personal search or investigation about the properties that are for sale or rent (it is my opinion not an advertisement): http://bulgaria-property.imoti.net/

5. The Bulgarian business portal where Analysis must be checked for the following Categories - Economic Policy and Analysis, Finance and Real Estate: http://www.econ.bg/

p.s. Please give your comments and ideas for what might be interesting for you.