DIRECT HOLDING OF REAL ESTATE

This paragraph discusses the most important tax implications for the direct holding of real estate. First of all, the impacts for resident individuals and non-resident individuals are discussed. Thereafter the impacts for resident companies and non-resident companies are discussed.

Resident individuals

Personal income tax

Rental income (as a direct holding income) received by resident individuals is subject to tax on the total annual basis of taxation. The annual basis of taxation for resident individuals shall be determined by way of decreasing the rental income received by the assumed allowable tax expenses amounting to 10 percent and it shall be taxed with tax on the total annual bases at a rate of 10% which is determined as taxable income from rent less instalments for Health insurance.

Deductibility of costs, interest, and depreciation

The only deductible costs are assumed allowed taxable expense at 10% and installments for Health insurance.

Losses – carry back/forward

Not applicable.

Non-resident individuals

Personal income tax

Rental income (as a direct holding income) received by non-resident individuals is subject to one off-tax. The OECD model tax convention provides explicit section for the real estates in article 6. According to this article the right to tax income from real estate is given to the state of source, that is, the state in which the property producing such income is situated. Rental income earned by non-resident individuals shall be taxed with one off tax tax at a rate of 10% on the gross amount of the income.

Deductibility of costs, interest and depreciation

There is no opportunity for individual to deduct costs in this case.

Resident companies

Corporate income tax

Rental income (as a direct holding income) earned by resident companies is part of profit before tax and subject to corporate tax.Company’s profit before tax shall be taxed with corporate tax at a rate of 10% and is determined as a difference between the total amount of revenues and the total amount of the costs. This profit before tax for accounting purposes is then adjusted for tax purposes to arrive at the basis for taxation with corporate tax at 10 percent rate.

Deductibility of costs, interest and depreciation

Companies that rent out RE to third parties may deduct applicable costs from its rent revenues such as depreciation costs, interest costs, maintenance costs, and operating costs which are deductible if the real estate is used for business purposes. The acquisition cost or building costs of real estate can be depreciated for tax purposes if they are used for business purposes with annual amortization rate which does not exceed 4%. 

Anti-tax avoidance directive 

Bulgaria adopted the laws, regulations and administrative provisions necessary to comply with COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016 by 31 December 2018 and applies those provisions from 1 January 2019 and further changes were accepted and entered into force in 2020.

Losses – carry back/forward

The unused losses can be carried forward against future taxable profits of this company in the next five years.

Non-resident companies

Corporate income tax

Rental income earned by non-resident companies is subject to tax at the source. Rental income earned by non-resident company shall be taxed with tax at the source at a rate of 10% on the gross amount of the income.

Deductibility of costs, interest and depreciation

Depreciation costs, interest costs, maintenance costs and operating costs are not deductible for tax purposes in Bulgaria.

Anti-tax avoidance directive 

Bulgaria adopted the laws, regulations and administrative provisions necessary to comply with COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016 by 31 December 2018 and applies those provisions from 1 January 2019 and further changes were accepted and entered into force in 2020.

INDIRECT HOLDING OF REAL ESTATE

This paragraph discusses the most important tax implications for the indirect (shares) holding of real estate. First the impacts for resident individuals and non-resident individuals are discussed. Thereafter the impacts for resident companies and non-resident companies are discussed. 

Resident individuals

Personal income tax

Individuals who hold shares in Bulgarian companies carrying out real estate transactions are entitled to receive dividend income as a form of distribution of profit.  ADSIC which are like REIT companies for an instance are obliged to distribute as a dividend at least 90% from the annual profit.

Dividend tax

Shareholders in a Bulgarian companies are subject to a 5% dividend one off tax in case of distribution of dividend.

Deductibility of costs, interest payments and depreciation

There is no opportunity for individual to deduct costs in this case.

Non-resident individuals

Personal income tax

Individuals who hold shares in a Bulgarian company carrying out real estate transactions are entitled to receive dividend income as a form of distribution of profit.

REIT companies are obliged to distribute as a dividend at least 90% from the annual profit.

Dividend tax

Shareholders in Bulgarian companies dealing with RE are subject to a 5% dividend one off tax in case of distribution of dividend.

Deductibility of costs, interest payments and depreciation

Not applicable.

Resident companies

Corporate income tax

Income, related to real estate earned by resident company that holds shares in entities that possess RE could be in the form of dividend or capital gains. 

Income received as a result of distribution of dividends to Bulgarian companies from local legal entities and from foreign entities that are residents for tax purposes of a member state of the European Union or of another state party to the Agreement on the European Economic Area are not tax recognizable. 

Capital gains from shares are taxed when realized i.e., transferred/sold, and become part of profit before tax. These are charged at 10% tax after the profit before tax for accounting purposes have been adjusted for tax purposes.

Capital gains from sales of shares in REIT on regulated market as determined by Bulgarian law are exempt from taxation.

Anti-tax avoidance directive 

Bulgaria adopted the laws, regulations and administrative provisions necessary to comply with COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016 by 31 December 2018 and applies those provisions from 1 January 2019 and further changes were accepted and entered into force in 2020.

Non-resident companies

Corporate income tax

Income, related to real estate, earned by non - resident company that holds shares in entities that possess RE could be in the form of dividend or capital gains from shares.

Income received as a result of distribution of dividends are taxed at the source. Tax is not due when the dividend is allocated to a foreign legal entity that is a resident for tax purposes of a member state of the European Union or of another state party to the Agreement on the European Economic Area, except in cases of hidden profit distribution. Otherwise, applicable rate is 5%.

Capital gains from shares that are not realized are not taxed. When realized they will be charged on the positive difference between the sale price and cost at a rate of 10%. 

Capital gains from sales of shares in REIT on regulated market determined by Bulgarian law are exempt from taxation.

Anti-tax avoidance directive 

Bulgaria adopted the laws, regulations and administrative provisions necessary to comply with COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016 by 31 December 2018 and applies those provisions from 1 January 2019 and further changes were accepted and entered into force in 2020.