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Introduction:
Bulgaria has come a long way since its former communist days and today has a stable government committed to economic reform. Ten years on, a healthy economy showing solid, steady growth and now a member of the European Union, Bulgarian Property is one of the fastest-growing and most sought after property markets in Europe.
Finding your property:
The first step to owning property in Bulgaria is to find a property you like. You can work with a real estate agent who knows what's on the market and can explain the pros and cons of each property to you. That agent can help guide you through negotiations and prepare you for the transaction. If the property seems cheap by UK standards, it may indicate that it:
- Requires significant refurbishment.
- Is built in an older style
- It's located in a remote area
- Only has an outside toilet
Many new developments, especially on the coast, are sold "off plan" which means that they are currently under construction. You need to ensure that the relevant terms and conditions are included in the preliminary contract - ask your legal advisor for assistance.
Setting up a Limited Company:
If a person is interested in buying or investing in land in Bulgaria, and if that person is not a Bulgarian citizen, he or she will need to establish what is known as a Bulgarian Limited Company through which land in Bulgaria can be purchased and legally owned.
The person/persons will be liable for the company's obligations to the value of his/hers share in the company's registered capital. The shareholders conduct preliminary discussions on the commercial activities they intend to engage in. Based on their agreement, Articles of Incorporation are prepared & signed by all shareholders.
A dedicated bank account is opened to collect all share capital. The minimum share capital required is 5,000 leva. Shareholders at time of registration must have paid at least 1/3 of their respective shares. It is required that at least 70% (3,500 leva) of the capital is raised at time of registration.
The company exists from the moment it is added to the Commercial Register of the district court of where the company will be based. The entry is made upon issue of a district court decision for the incorporation. The following documents must be available at the time of the submission of registration application to the district court:
1. Articles of incorporation;
2. Memorandum for appointment of Director/ Directors;
3. Proof that each shareholder has paid at least one third of its interest, but not less than 10 leva;
4. Proof that at least 70 per cent of the registered capital has been paid.
The Bulgarian State Gazette is the official paper of Bulgarian State. All Bulgarian legislation is published there for the law to take effect. Publication of the company entry in the Commercial Register does not complete your company formation, it announces to the general public the act of formation.
Finally, your new company will need to register immediately with the National Tax Register Authority. The costs involved are:
- 3,500 leva = 70% share capital.
- Administrative costs (payable to the state & registration court) are 250 leva (just over £70).
This is the minimum capital that you need to raise for registration. Once the entire share capital has been paid up these funds can be accessed and withdrawn. The process of forming your company can take anywhere between a few days to a few weeks.
Preliminary Contract:
Once this Bulgarian Limited Company has been established, the hunt for land/property to purchase can begin in earnest. At the time that a piece of property has been identified that a person is interested in buying, an oral offer to purchase is made to the seller. If the seller orally accepts a buyer's offer, the next step in the purchasing process is the preparation and signing of what is known as a preliminary contract.
Customarily, in Bulgaria, at the time the preliminary contract is executed, a 10% deposit is placed or made by the buyer. Generally speaking, the deposit is non-refundable unless the seller withdraws from the contract or cannot, in the end, provide a clear conveyance of the property in question to the buyer. In other words, if the buyer pulls out of the deal, he or she will lose his or her deposit money.
The preliminary contract will be drawn up in the Bulgarian language - in which case it is advisable to have a translator present to translate its contents to you verbally.
There are some companies who will provide the preliminary contract in English (together with the Bulgarian version), which makes the whole process much easier. Do note that the contract must exist in at least the Bulgarian language to be legal. If you are asked to sign a contract that is ONLY in English, this will not be legally binding in Bulgaria.
The preliminary contract itself is signed by both parties, i.e. you the buyer and the individual(s) selling the property. In this contract, you will generally find the full specification of what you are buying and any land associated with the property will be quoted in square metres.
Do ensure that the amount of land quoted is what you were told by the estate agent/owner. The contract will state the actual deposit amount that you will give to the buyer and will contain any protective clauses added by your solicitor.
Negotiating the right price:
Before agreeing to purchase the property, it is always a good idea to negotiate the price, just as you would in many other countries in the world. If you are using an agent, then tell the agent what price you are prepared to pay for the property and the agent will then negotiate on your behalf (in theory).
But do note that the agent is actually lowering their own commission by negotiating a lower price for you - which is not a good incentive for them to achieve the best possible price for you. They will of course tell you that they will get the best price for you, but what do you expect them to say.
It is difficult, as it would not be appropriate for you to deal with the owner directly when going through an agent. What this means, realistically, is that you need to be prepared to walk away. Be firm, and have several properties lined up. You could also consider offering a bonus commission to the agent if they get the price you want. That way, there's an additional incentive for them.
But do your homework and have a good appreciation of the selling prices of the kind of properties you are interested in. Some unscrupulous agents may increase the price when they know a foreigner is buying; so be aware of this, and be prepared to negotiate. Many sellers in Bulgaria are prepared to sit on their property or land until the 'right' buyer comes along, so negotiation may not always work in your favour.
Transfer taxes:
In Bulgaria, property transactions are inevitably subject to tax. It's important that you factor these charges into your financial planning.
Corporate tax
Apart from corporate tax (15% in 2005), no other direct taxes are levied on the transfer of real property. The transfer is, however, subject to notary and municipal fees. The notary fees are paid on the higher of the market price or the book value of the property at varying rates, with the maximum being BGN3,500 (about EUR1,750). In addition, 2% of the market value of the property is paid to the municipality in which the real property is situated upon completion.
Capital Gains Tax
There is no Capital Gains Tax on the profit when your company sells the property but the standard rate of corporate tax (15% in 2005).
Local taxes and rates
The owner of a building or a plot is obliged to pay a real property tax. Where a building is built on a State or municipal plot, the value of the plot will also be included in the tax base. The tax is equal to 0.15% of the book value of the property. Arable land is exempt from local taxes. In addition to the real property tax, owners also pay waste-collection fees.
Value Added Tax
Transactions with land and lease of property for residential purposes are exempt from VAT (Value Added Tax); all other real estate transactions are subject to VAT at the uniform rate of 20%. The buyer/lessee is entitled to a VAT refund, provided that it is registered for VAT purposes
Paying the Deposit:
At the time of signing the preliminary contract you will also (generally) be expected to pay a 10 per cent deposit to the owner. This is generally expected to be paid in cash, and is handed to the owner after the contract has been signed by both parties. However, do not be afraid to request a bank transfer if you are uncomfortable making a cash deposit.
Now, you may be in the situation that you don't carry 6,000 euros for this occasion. So, it's not uncommon to agree a smaller amount to be handed over at the point of signing the contract - with an agreement to settle the remainder of the deposit within 7-10 days. For example, 1,000-2,000 euros is generally accepted at this stage. As a rule this is also added to the preliminary contract - so it is your legal duty to settle the deposit by the date stated.
So, after signing the preliminary contract, is that it? Well, not quite. You now need to go to the notary public, together with the seller. This process will in most cases be managed by your agent / local estate agent. Here, the notary will verify the identity of the buyer / seller and essentially authenticate the preliminary contract and supporting documentation, including any power of attorney documents.
Signing the Final Contract:
There are a couple of ways of dealing with the final contract. One is to give power of attorney to someone you trust to sign the paperwork on your behalf. The other is to come to Bulgaria yourself. Clearly, such an important stage in the purchase process would benefit from your presence, so do try to make every effort to sign the final contract yourself.
If you are purchasing a new property it's even more important, especially if you did tie additional points to the preliminary contract. In such a case you will have to inspect the property and be sure that the issues have been addressed.
It is advisable to arrange for the final contract to be translated in English, as this will become the final binding legal contract - and the preliminary contract will no longer be valid. Do be sure to read through the whole contract. Check that it includes all the rooms, land etc. that you understand the property to have, and do check that the declared purchase price is stated correctly.
Signing the Notary Act:
This is the final stage when you will complete the purchase and become the new owner of the property. You must confirm before the Notary Public the agreement to buy the property. The state and Municipal taxes must be paid, the full amount paid to the vendor and the title deed will be transferred into your company name.
Financing options:
At present, it is difficult to find organisations within the UK that will provide mortgages for the purchase of property in Bulgaria. This will change in time, just as it has for other areas such as France and Spain. As an emerging market, Bulgaria has yet to convince the majority of financial establishments that it's a worthy location.
There are a number of approaches that you can take to finance your purchase. By far one of the most popular approaches is to re-mortgage your own home to release the equity. This can sometimes provide a considerable amount of money for investment purposes. Simply contact your mortgage provider and ask them about their additional borrowing facilities (against your mortgage). They will be more than happy to assist you - after all, they will be increasing their own income and stand to gain from your interest payments!
However, if you are not this fortunate or have already spent the money you have released from the equity in your home, you will have to consider other options. Perhaps you can borrow some money from friends or family? You could also consider releasing any money that you may have tied up in shares, savings accounts, ISA's etc.
The other option, although less favourable, is to consider applying for a personal loan. Personal loans are offered by a large number of organizations who compete heavily on the interest rates - with the UK offering rates as low as 6.2 per cent currently.
When considering such additional financial obligations, you do of course need to ensure you can afford the payments (foremost) and that you can reasonably predict a return on your investment that is substantially above the interest rate of your loan. That's easier said than done of course, because none of us have a crystal ball, and can realistically predict the future. But there are market reports produced by well respected organizations that do forecast economic trends in real estate and these can act as your guide when making such important decisions.
Finally, there are overseas mortgage specialists who can organise mortgages in many countries. For example, Conti Financial Services (www. mortgagesoverseas.com) now provide finance options to purchase property in Bulgaria provided that you meet certain criteria.
Summary of Financing Options
In summary, then, you can look at the following sources for generating the money to purchase your property in Bulgaria:
- Your personal savings, ISA funds, premium bonds, fixed deposit certificates etc.
- Your stock market shares.
- A low interest (or no interest) loan from friends or family members.
- Additional borrowing on your mortgage (sometimes referred to as 'flexible loans').
- A personal loan.
- If in a two-car family, the sale of one of the cars (a small price to pay, perhaps!).
- Approaching a Bulgarian bank for a mortgage.
- Approaching a bank in your own country for a mortgage on a property in Bulgaria.
- In extreme cases, when you want to 'live the dream', the cash remaining from the sale of your own house.
- Contacting an overseas mortgage specialist
Banking issues
If you are seriously intending to buy property in Bulgaria, it's a good idea to open a bank account early on in your visit. This can save you some valuable time, particularly when you have lots of legal matters to attend to during the purchase.
The quality of service offered by banks in Bulgaria varies quite a lot, as do their fee structures. Look for a bank that can offer you:
- Full internet banking (preferably with no monthly costs)
- Low fees (or no fees) for the receipt of foreign currency by electronic transfer
- A current account, that preferably pays interest
- No monthly costs for holding the account
- Low (or no) initial deposit for opening the account
- English speaking tellers / representatives in the bank itself
- Low fees (or no fees) for withdrawing your own money!
Note that when you transfer money from your country to Bulgaria, some banks often charge you for the receipt of that money in your Bulgarian bank account. Now, whilst the majority of us are used to flat fees for bank transfers, in Bulgaria some of the banks charge you a percentage of the amount you are receiving. That is, they do not charge you a fixed fee. So, if you are transferring quite a large sum for the final payment on your property, some banks may quite happily take a percentage of that from you.
You will find it very difficult to find a bank that meets all the criteria above, but it's possible to find banks that meet a good majority of them. ING Bank (www.ing.bg) in Bulgaria, has an excellent internet banking service, you can pay your electricity bills easily by direct debit and they do not charge you for the receipt of funds transferred via an international bank transfer.
It is worth shopping around for the best bank to suit your needs - others you may want to review include:
To avoid being charged for withdrawing cash when you plan to pay a deposit or final payment, set up a bank transfer to the seller instead, which will save you money. Bank transfers tend to have low, fixed fees.
Property purchase timeline:
Generally it will take 3-5 weeks to buy a property. This is dependent on a number of factors, not all of which are in your control. Once you have decided on a property, contact will be made with the seller or his estate agent.
The terms and conditions of the sale can be negotiated very quickly, therefore it is important to have an accurate picture of the condition of the property, likely repairs that will be needed and its consequent value.
Usually a surveyor can prepare a report within a week of instructions. The legal title to the property can be checked at the Land Register in a day or two. Searches with the local authority, trying to confirm the uses and building permissions associated with the property, will similarly take several days.
The Preliminary Contract is then exchanged and a deposit paid. There is then a period of, at maximum, a few days while the money transfer is arranged and any final checks made. The sale will take place in front of a Notary at an agreed date and time.
Tax-Related Information
A property in Bulgaria generally has much lower running costs, compared to those in other European countries. The owner of a property is obliged to pay an annual property tax, which is equal to 0.15% of the declared value of the property.
If your property is part of a residential complex then you will also be liable for a communal charge for maintenance and upkeep of the communal areas. This varies from development to development but is usually in the region of Euros 10/m sq/pa. You may also have taxes that need to be paid, but as we are not tax advisers, and this varies from individual to individual, please do consult your lawyer or a tax adviser.
Double Taxation Treaties
Bulgaria is a signatory to a Treaty for the Prevention of Double Taxation with many countries all over the world. Draft agreements with additional countries are at the discussion stages.
A Double Taxation Prevention Treaty, in principle, enables offsetting tax paid in one of 2 countries against the tax payable in the other, in this way preventing double taxation.
Another important factor is the grant of an exemption or tax at a reduced rate on certain receipts such as interest, royalties, dividends, capital gains and others that are connected with a transaction carried out between parties associated with the Double Taxation Prevention Treaty.
It is of the utmost importance to stress that the Double Taxation Prevention Treaty takes precedence over the Bulgarian Income Tax Ordinance. In other words, if certain income is taxable under the Bulgarian Income Tax Ordinance but there is an exemption (reduced tax) under any Taxation Treaty, the income is taxed, if at all, but only according to the provisions of the Taxation Treaty.
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Property Purchase Process:
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