Bulgarian property – useful information about buying

Premier Apartments Bulgaria primarily seeks to facilitate investment in off-plan developments in the Bulgarian property market using the criteria detailed below.

The markets of South East Europe currently offer some of the best returns in continental Europe. We believe that these potential returns, coupled with structural and legal reform programs currently in place as a result of EU entry ambitions should lead to asset price inflation as a result of risk reduction.

The criteria used in choosing the locations are:

• Prime strategic locations
• Infrastructure, and
• Current and future contingent developments

Even if your budget is small, property in Bulgaria offers considerably value for money when compared to other European destinations.

The majority of people who are buying property in Bulgaria are looking for holiday/second homes often with a view to retirement in later years although there are an increasing number of investors who are simply buying property with a view to making a capital gain in the short or long term. This increasing interest, along with other factors such as the rise in tourist numbers, better awareness and EU entry on the cards for 2007 is pushing prices higher.

Although purchasing property in Bulgaria is not too dissimilar from buying anywhere else there are some differences and important points for you to bear in mind below. We hope you find this guide both useful and informative.

The Buying Process

1) Property Selection

• Having chosen the apartment you want and confirmed its availability; complete a reservation form and pay a 750 reservation fee. This can be done on-line on our web page www.premierapartmentsbg.com.
  Note: Your reservation fee is non-refundable. It will however be deducted from the purchase price of your property upon receipt of the first instalment.

2) Use a Company or Not?

• According to the Bulgarian Constitution, foreign individuals may purchase buildings/ apartments but not land. Therefore the preferred option for foreigners buying property in Bulgaria where they also wish to own the land is to set up a company which then owns the land and the buildings.
  The law is expected to change on this within the short to medium term with the expected entry of Bulgaria into the European Union (2007). Don’t however hold your breath as current amendments will EU citizens to acquire land directly only in 2014. In the meantime a company is still required for land ownership.

Hence, there are 2 methods to acquire an apartment:

• With a portion of land; or
• Freehold unit title (with no land).

Property Acquired with Land

First step is the establishment of a locally registered company. This is a standard process that most local legal firms offer, and takes anywhere from a few days to several weeks. Allow around €750 for legal fees relating to the company formation and €500 pa for administration costs.

Key points worth noting are as follows:

• Articles of Incorporation must be prepared & signed by all shareholders in front of a Notary in Bulgaria; a Bulgarian Embassy or apostled in your home country.
• A local bank account must be established;
• The minimum share capital required is €2,600 (5,000 leva);
• Company taxes are calculated at 15% of net profit.

Property Acquired without Land

There is no need to set up a company. The apartment is acquired freehold and is owned directly by the acquirer. There is no need for the acquisition documents to be signed in Bulgaria or at a representative Embassy.

3) Sale & Purchase Contracts

• Once you have selected your apartment and paid the reservation, you will receive a preliminary sale and purchase contract.
• Check all the details are correct before signing 2 copies; we recommend the use of an independent lawyer to review the contract before you sign;
• Return the documents to either our London or Sofia offices along with your initial instalment as detailed in the contracts within 30 days.
• Should you wish to arrange an inspection trip, we would be more than happy to assist you.

4) Construction & Final Completion

• Usually there are one or more interim instalment payments to be made prior to the full completion of the property. We will notify you of the estimated payment dates.
• Upon completion of the property and payment of the final instalment, the transfer of title may occur. In Bulgaria, the property registry system works in conjunction with local Notaries.
• In order to take delivery of your property, you will need to sign the ‘Notary Act’. This is a standard form document transferring ownership of the property into your name.
• You will receive title deeds within 7-10 days of the Notary Act from the local council.
  Note: If you are unable to attend the Notary Act in person, your legal representative may attend in your place. This individual will need to be a qualified Bulgarian solicitor in possession of a ‘Power of Attorney’ agreement. We are able to liaise with you to arrange this.

5) Additional Acquisition Costs

Local tax

According to the Local Taxes and Fees Act, the tax payable upon the sale-and-purchase of an apartment is 2% local tax.

The basis for calculating the tax is the higher of:

• The apartment’s price as specified in the notary deed, and
• The tax evaluation of the apartment.

Such tax is payable by the purchaser, unless the parties have agreed otherwise.

Notary fees

The notary fees are determined in accordance with the tariff for the Notary Fees. There are various charges but you should allow €1,500-€2,000.

Legal fee

Each lawyer or law firm is free to determine its fees, subject to certain constraints. There are also different schemes of determining the fees (e.g. on an hourly basis, a fixed fee etc.).
The rates of the lawyers vary from €80 to €150 per hour. Total legal fees are estimated at €500-€600.

6) Other Expenses

• Annual property taxes amount to 0.15% of the tax value of the property (usually significantly below the acquisition price);
• Maintenance of your property is covered by the Management Contract and is charged at a fixed rate in euros per square metre per year; and
• Waste-collection fees are determined when you register ownership with the local municipality; rates vary from region to region.

Remember to register your new property ownership with the local authorities after completion for rating purposes. This should be done within 60 days following completion.

BUYER BEWARE

Understanding the vat implications on any property purchase in the Bulgarian property market is extremely important, given the potential mortgage and tax implications.

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Notary tax explained

The Bulgarian property market is characterized by poorly clarified regulatory and tax policy resulting in inconsistent implementation and varying valuations (both market related and tax based); all of which if misunderstood may result in potential tax liabilities in future periods combined with lower debt/equity borrowing facilities been available to the acquirer. In this section we attempt to clarify and demystify the situation.

Notary System

The Bulgarian property system uses Notaries and a Notary Act in order to transfer the ownership of buildings and/or land.

Upon completion of the property and prior to signing the Notary Act, the local municipal council conducts a tax evaluation of each property. This valuation represents the minimum value that must be reflected on the Notary Act. It is this value that at a minimum must appear on the Notary Deed in property transactions in Bulgaria.

Tax evaluation rates vary by region across Bulgaria but in general range from 25-50% of the full market value; this is however set to change in the coming months given the current tax valuations were set back in 1999.

Payment Structures

In general developers require settlement to be made in one of two ways:

• Part “on-shore” (meaning 100% of the payment comes into Bulgaria) and part off-shore; the tax valuation of the property (see above) is paid on-shore and the remainder of the balance is paid off-shore; or
  
• Full payment on-shore.

The payment structure has various knock on effects as further detailed below:

• The on-shore payment is the amount reflected on the Notary Deed;
• Notary fees are based on the amount reflected on the Notary Deed;
• Local municipal fees are based on the amount reflected on the Notary Deed; and
• Local Mortgage facilities are based on the Notary valuation and not on the sale and purchase contract.

Example:

Property to be acquired costs €100,000. Payment is 50% on-shore (tax valuation) and 50% off-shore.

A. €50,000 is paid into a Bulgarian bank account. The Notary deed discloses the final purchase price as €50,000. The following points are worth noting:

• Current mortgage facilities allow for 70% of the notary deed to be borrowed – hence in effect the property is 35% mortgaged (50% of the 70% allowed);
  
• Were the property to be sold after a period for say €120,000 the owner would be subject to a €70,000 capital gain (€120,000 less €50,000) resulting in a tax liability of €10,500 rather than €3,000; unless of course the property could be sold for a part on-shore part off-shore payment again.

B. €50,000 is paid off-shore. From a developers perspective this payment structure avoids a vat payment of €10,000 (€50,000 x 20%) as well as corporate taxes on the profits.

In general, if a purchaser wishes to reflect a value higher than the tax evaluation on the Notary Deed, extra costs incurred as a result of this action are paid by the purchaser. These costs can include extra notary fees, municipal taxes and VAT. In particular for new build properties, a higher Notary Act price can increase the purchase price by up to 14% alone.

Please note, at the top of all of our availability and price lists we have clearly outlined the pricing structure.

Premier Apartments Bulgaria accepts no liability for the following:

• Content of the tax evaluation;
• Ability to obtain mortgage facilities;
• Future capital gains on sale of property holdings

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Bulgarian Property - Why Invest?

• The Bulgarian Economy is growing steadily - Strong growth in industrial production, employment and credit has resulted in high GDP growth over the last few years. The economy has grown at an average rate of 4.8 % over the last five years and despite this, inflation has been reduced to the low level of 2.3 % in 2003. Foreign direct investment (‘FDI’) into Bulgaria has increased on a year on year basis over the past three years. FDI reached US$7.4 billion in 2003 from US$5.7 billion in 2002 (a 30% increase). The growth in the Bulgarian economy should underpin a strong property market and lead to increased Bulgaria property prices.
  
  
• Bulgaria Property prices are relatively low - Property in the better residential areas of Sofia sells for around €1,000 – 1,200 per square metre (roughly £67 – £82 per square foot). To give regional comparisons, the best residential property in Zagreb, Croatia sells for €2,200 – 2,500 per square metre, in Belgrade, Serbia €2,000 – 2,200 per square metre, in Romania for over €1,500 per square metre and in Athens, Greece for €7,600 – 8,800 per square metre. It is clear that Bulgaria property is significantly cheaper than many other countries in the immediate area. By way of comparison, in London, property in a number of residential areas (such as Knightsbridge, Kensington and Chelsea) can sell for approximately €16,000 per square metre (£1,000 per square foot).
  
  
• Low Currency risk - The Lev has been pegged to the Euro since its introduction at a fixed rate equivalent to €1 to Lev 1.9558. From 1997 the Lev was pegged to the DM at a rate of 1 Lev to 1 DM.
  
  
• The current cost of domestic borrowing is relatively high - The rate that ordinary Bulgarians pay for a floating rate mortgage is in the range of 10 – 12% pa. We believe that once Bulgaria joins the EU, interest rates should fall in order to harmonise with rates in the Euro zone. Lower interest rates should help stimulate the Bulgaria property market.
  
  
• It is currently possible to achieve high rental yields on property - Rental yields on residential property are currently in the range of 10 – 12% of the purchase cost and on commercial / industrial property yields of 16% or more may be obtainable. We believe that the company should be able to achieve higher rental yield on properties which it has developed or refurbished.
  
  
• Much residential property available is unsuitable for letting - There is currently no mechanism whereby individual leaseholders can be compelled to contribute towards the cost of repairs to common parts and exterior of buildings unless their leases specifically contain provisions to this effect. Whilst suitable provision is sometimes made in the leases of recently constructed blocks, blocks constructed in the communist era, or earlier, rarely have such clauses in leases. The result is that unless all the owners in a block agree to repair, nothing may be done. Even in the best residential areas of Sofia the common parts of older blocks are frequently unattractive and are, therefore, difficult to let. Good quality modern blocks of flats therefore command a premium in the letting market.
  
  
• The Bulgaria property market is relatively unsophisticated - Whilst there are estate agents in Sofia, they generally do not have shop fronts displaying Bulgarian properties that are for sale with prices clearly stated. It is common practice that estate agents charge fees to both buyer and seller. This increases costs and hence reduces the liquidity of the market. With accession to the EU, it is probable that this situation will change, with a consequent beneficial impact on the Bulgaria property market. Premier Apartments generally receives fees from the vendor.
  
  
• Little modern commercial and industrial property development - We believe that there has been little commercial and industrial Bulgaria property development, particularly of warehouses and distribution centres including cold storage.
  
  
• Property Taxation and VAT - Real estate tax is an annual tax and amounts to 0.15% on the assessed value of the property. The tax base for a legal entity is the real estate's cost as per the balance sheet of the company (the real estate’s net book value plus the accumulated depreciation costs). The real estate tax applies to land (but not to agricultural land and forests) and buildings. The tax is payable regardless of whether the immovable property is used or not. The tax liability is on the owners of the immovable property. A 2% municipal tax is paid upon the acquisition of immovable property based on its value. For the transfer of property where notary certification is necessary, a notary transfer fee is due. It is defined in a regressive scale depending on the value of the transferred property. The fee cannot exceed Lev 3,000. In addition a notary fee of 0.1% of the value of the property is payable on registration. VAT on property transactions and on development costs would normally be charged at the Bulgarian VAT rate of 20%.
  
  
• The Bulgarian property market is characterized by poorly clarified regulatory and tax policy resulting in inconsistent implementation and varying valuations (both market related and tax based); all of which if misunderstood may result in potential tax liabilities in future periods combined with lower debt/equity borrowing facilities been available to the acquirer. In this section we attempt to clarify and demystify the situation.

Taxation in Bulgaria

For offshore investment in Bulgaria, there are many varying tax and company structures available. We are in a position to suggest possible structures for individual investors, but would always suggest our clients to get independent advice.

Tax rates will vary for every individual depending on the origin of funds and the repatriation of profits, therefore we look at each investment on a case by case basis.

Whatever the extent of your investment, we are able to offer advice and are continually monitoring of the situation.

• Bulgaria Tax Summary
• KPMG Bulgaria
• Deloitte Sofia
• Price Waterhouse Coopers' Report
• Comprehensive tax guide

Bulgarian Corporate Tax

Operating subsidiaries in Bulgaria in the form of special purpose vehicles ('SVPs') will be subject to tax in Bulgaria on their taxable profits at the rate of 19.5%. In the 2005 financial year corporation tax is expected to be reduced by 15%.

On 1 January 2007, Bulgaria is expected to join the EU. Under the 1990 EC Directive 90/435/EEC, dividend payments by a subsidiary in one member state eg Bulgaria to a parent in another eg the UK, will not be subject to withholding tax, subject to the parent holding at least 25% of the share capital of the subsidiary. Credit will continue to be available in the UK for any underlying tax suffered in Bulgaria.

Foreign ownership in Bulgaria

Under the Bulgarian act on Foreign Ownership, foreigners are not allowed to own land but may own buildings. Foreigners can however own land by setting up a Bulgarian company to hold the Bulgarian property for them.

The situation is summarised below:

• No land ownership for foreigners in Bulgaria.
• Buildings can be owned by foreigners.
• Foreigners wishing to own land can do so through a company.
• Bulgarian company incorporation costs less than £600.
• Bulgaria’s ownership policy will be harmonised with the EU in the future.
• We recommend company ownership for security of your investment.

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