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Legal Guide

LEGAL GUIDE TO BUYING A PROPERTY IN BULGARIA

                                              Basic issues:


DUE DILLIGENCE

Before purchasing real estate it is recommended that you ensure verification of the ownership status of the targeted property, including the following:
1. The seller is the owner of title of the property;
2. There are no registered liens and/ or encumbrances over the targeted real estate, e.g., mortgages, interlocutory injunctions, going-concern pledges, limited property rights in favor of third parties;
3. There are no other registered rights in favor of third parties – if there are registered rental or lease agreements over the targeted real estate then the buyer shall be bound by them until the expiration of their term;
4. There are no court or restitution claims;
5. The targeted real estate has all necessary construction permits if buying off-plan.

RESERVATION DEPOSIT

Once one has found a property he wishes to buy, he needs to pay a reservation deposit to the seller. This is done in order for the seller to stop the marketing of the relevant real estate, thus avoiding double sales of one and the same property.

 PRELIMINARY CONTRACT

Once the checks on the property have been carried out, and after guaranteeing that the legal situation of the property allows the sale to take place, the buyer can sign the so-called Preliminary Contract.
This contract is called preliminary because it cannot itself transfer title on the property – a final contract in the form of a notary deed is needed. The Preliminary Contact describes the buyer and the seller, the property, the sale’s price, the method of payment, the date when the notary deed shall be signed, the date the buyer shall take possession of the property, rights and obligations of the parties, penalties in the event of default, etc. On one hand it allows the buyer to raise the funds necessary for the transaction and on the other hand it allows the seller to obtain all necessary documents for the transfer of the title. This contract is binding since if one of the parties refuses to perform under it the other party may go to the court to enforce it.

OFF-PLAN PURCHASE

When buying off-plan one should know that the purchase contract is a complex one and consists of two parts, which can be treated as separate contracts – a preliminary contract for the transfer of the right to build which transforms itself into right of ownership of the apartment when the apartment is build and a contract for the construction of the apartment which is to be performed according to the construction schedule specified in the contract itself. The developer assumes the obligation to organize the construction of the real estate and deliver the real estate to the buyer in the way it is specified in the preliminary contract. This contract is effective upon its being signed by both parties and it regulates the payment plans and the manner in which the property is being built. It governs also any delay in the performance of the obligations of both parties as well as the warranty time periods and the cure of any defects in the construction works. It also specifies the way the buyer can exercise control over the construction works.
It should be noted also that usually the developer is an investor that has acquired the ownership title, or the right to construct in the land plot on which construction works are to be carried out. The developer usually (but not always) assigns the performance of the construction works itself to a contractor. The contractor is responsible for the execution of the building in compliance with the approved designs and permits and the legal requirements concerning construction works, methods, materials and products, as well as for preparing the “as-made” documentation of the building, if explicitly assigned to him under the construction contract. The developer organizes and finances the whole construction process, issues all relevant documents, permits and certificates, controls the process and delivers the individual properties to their buyers.
Since the developer is the owner of the land plot or the right to build upon the completion of the building he becomes the owner of all apartments in the premises. Then the developer starts to transfer the title of the apartments to the individual buyers by notary deeds. With the preliminary contract both the developer and the buyer assume an obligation to appear before a competent notary public once the building is completed and to transfer the title from the developer to the buyer. It is legally binding obligation and if one of the parties refuses to appear before the notary the other party can file a claim before the respective court and enforce the contract. The court decision will replace the final contract in the form of a notary deed and will transfer the title on the property to the buyer.

COMPLETION (SIGNING THE TITTLE DEED)

The right of ownership of real estate is transferred in the form of a notary deed. The notary deed is a type of contract which form and content are prescribed by law. It is executed by a notary public within whose region the real estate is located. As the notary is under obligation to check the identity of the parties, their capacity, the authority of the representatives and the good title of the transferor, the process of execution of the notary deed offers considerable security. After the deed is executed it is registered by a registry judge upon request of the notary. Immediately after the deeds have been signed, the buyer is handed the property keys, and can take possession of the latter.
Upon execution of the notary deed certain taxes, charges and fees are due. A 2% local tax levied upon the price agreed between the parties, or the valuation of the property by the tax authorities, whichever is higher, is due. The notary fee is calculated according to rates specified in the law and it is up to 1%, depending on the price indicated in the title deed. Thirdly, a charge for the registration of the notary deed by the registry judge need be paid, amounting to 0.1 per cent of the price.

MORTGAGES:

The purchase of a property in Bulgaria can be financed with a mortgage on a real estate owned by the purchaser or by a third party. A mortgage can be created on the purchased real estate or alternatively on a property, which has nothing to do with the current transaction but which is used as collateral for the loan given.
The Bulgarian legislation recognizes two kinds of mortgages: contractual mortgage and statutory mortgage. The contractual mortgage is an agreement between the owner of the real estate and the creditor for the use of this property as a security for the loan. It should be done in the form of a notary deed, pretty much the way the title is transferred from a seller to a buyer. It should be noted that contractual mortgage on the purchased property can be done after the notary transfer is completed.
However the statutory mortgage can be a very useful source for the financing of the purchase itself if let say the funds for the purchase are not sufficient. This mortgage stems from the operation of law. If the buyer takes a loan from the bank to finance the transaction then the bank is allowed to create unilaterally a mortgage on the real estate to be purchased with the loan. This is very convenient both for the buyer and the bank. The buyer only has to apply for a loan, collecting some necessary documents required by the bank and the loan will be easily granted. On the other hand the bank can easily have a security for the debt just by filing a request to the Real Estate Registry and a mortgage in the amount of the loan given will be created. A statutory mortgage can be created also in favour of the seller if the buyer has not paid the full contract price. That is if the developer agrees to give a credit to the buyer (i.e. transferring the title before getting all the money) he can create a mortgage on the purchased real estate in the amount of the unpaid installment.
It is important to know that the title of the real estate that serves as collateral is not transferred. If later the property is sold to somebody else and the mortgage is not discharged, the mortgage is enforceable against the rights of the new owner. If the debtor is in default and the credit is secured by a mortgage, the creditor (i.e. the bank) may require from the bailiff to make a public sale of the property encumbered. Upon the completion of the sale the creditor may satisfy from the price of the real estate up to the amount of the credit given. The rest is given back to the owner.

SETTING UP A COMPANY

The best company form for foreigners is the limited liability company. The limited liability company is founded or owned by one (SPLLC or ÅÎÎÄ in Bulgarian) or more persons (LLC or ÎÎÄ in Bulgarian), including foreign natural or legal persons. The minimum subscribed capital is BGN 5,000. It is registered with the district court located in the region of the seat of the company. The time frame for the setting up is around one month. Using a Bulgarian company for buying property in Bulgaria has its own advantages and drawbacks. If the company has enough turnover it can register for VAT. However buying through company will not allow you to qualify for the capital gains exemptions applicable for natural persons.

POWER OF ATTORNEY

Usually everyone should sign all relevant documents (reservation agreements, preliminary contracts, notary deeds, mortgage deeds, bank account documents, etc.) by himself. Often this proves to be difficult since the person cannot come to sign the documents by himself and in this case he can authorize someone to do it on his behalf. The authorization is done through a Power of attorney, by the virtue of which the buyer authorizes third person (usually a solicitor) to do the relevant acts on his behalf. The power of attorney does not bind the proxy to do the act on behalf of the authorizer but only empowers him to do so. In order to have a binding effect another contract between the authorizer and the attorney is need – a service contract, which stipulates the rights and the obligations of each party. With a simple power of attorney signed by the represented person the proxy may perform various activities on behalf of the authorizer, however he cannot sign notary deeds, mortgage deeds or bank documents. In order to do so, the proxy needs a power of attorney with a notary verification of the signature. The notary verification can be done at any Bulgarian notary public in Bulgaria or in every Bulgarian consulate abroad. Another option is to get the Power of attorney notarized by a notary public in one’s respective country which is then legalized by the respective authorities in the country by appostile. The power of attorney then can be freely recognized in Bulgaria.

PAYMENTS

Usually the payments are executed not directly to the seller but to purchasers’ own solicitors. The solicitors keep the money in their clients’ accounts. The solicitors’ clients’ accounts are regulated by the law. The relations between the client and the solicitors are fixed in a contract between them.

WILLS

A will, signed by a foreigner before a notary public in Bulgaria is recognized in Bulgaria. A will signed abroad is recognized in Bulgaria if one of the following is met:
1.  The will is valid under the law of the country, where the will is executed or
2. The will is valid under the law of the country, which is generally applicable to the person at the moment of the execution of the will or at the moment of his death or
3. The will is valid under the law of the country, where the person has his domicile or permanent abode at the moment of the execution of the will or at the moment of his death;
A foreigner may also choose the applicable law. This shall be done in a separate statement in the will itself provided this statement is signed independently from the will statement.

TAXES

 V.A.T.

VAT is chargeable on the sale of real estate in Bulgaria and it amounts to 20% of the purchase price. When one buys he pays the VAT as well, which the seller collects and remits to the government.

ANNUAL PROPERTY TAX AND WASTE COLLECTION FEES

Owners of real estate in Bulgaria are liable to pay an annual tax and waste collection fees on the tax valuation of the property. The tax evaluation is determined by statutory rates and it depends on the location, structure, size, depreciation, etc., of the property. Generally these taxes are paid in four installments per year and in most of the cases do not surpass 150 Euro per annum.

CAPITAL GAINS TAX

Capital gains tax is charged on the positive difference between the acquisition price and the resale price. The tax rate is 10%, however since the 1st of January 2007, there are some exemptions for both Bulgarian and EU tax residents:
- If one dwelling (house, apartment) is sold in the respective year – no capital gains tax is due on the profit;
- If two properties are sold in the respective year, no capital gains tax is due if they have been owned for at least five years.

INCOME TAX FOR INDIVIDUALS

Generally speaking if one is Bulgarian tax resident he is subject to tax on all his incomes, regardless where acquired. If one is Bulgarian non-resident he shall be subject to tax on incomes with a source in Bulgaria only. These incomes are taxed with a final withholding tax at the source – if the person one is reselling to is a Bulgarian company, sole trader etc., he is obliged to collect the tax before transferring the income to the seller. If the person is not obliged to collect the tax from seller, the latter should pay it by himself within 30 days from the transaction.

BULGARIAN TAX RESIDENTS

Irrespective of their citizenship, Bulgarian tax residents are deemed those persons who have their permanent domicile in Bulgaria or reside in the country for more than 183 days in any 365 days’ period (in this case the individual becomes a resident taxpayer for the calendar year in which the 183-day threshold is exceeded). Resident taxpayers are taxed in Bulgaria on their worldwide income – on incomes with source both in Bulgaria and abroad. All others are deemed non-residents and they have tax liability only for their income derived from Bulgarian sources. An income derived from a transaction with a real estate is always deemed to be from a source in Bulgaria. Income from flipping (selling a preliminary contract before the title deed) between foreign residents is usually not considered to be from a source in Bulgaria, however if one of the parties is Bulgarian tax resident then the income shall be taxed in Bulgaria.
All exemptions applicable to Bulgarian tax residents are applicable to EU tax residents.

CORPORATE TAXATION

Corporate taxation is very specific and it depends on the overall performance of the company in the year.

DOUBLE TAXATION

Foreign tax residents pay taxes on all income with a source in Bulgaria and any profits from real estates in Bulgaria are deemed with a source in Bulgaria. However foreign residents pay taxes in their home country on their world wide income, which may lead to double taxation. This double taxation is eliminated by the treaties signed by the different countries.
Bulgaria has concluded a number of treaties for avoiding double taxation with numerous countries, including UK and Ireland. Generally under these conventions taxes paid in Bulgaria shall be credited against taxes on the same item of income in the other country. If you are eligible for the capital gains exemption in Bulgaria, you shall be liable for the taxes in your country only.

LEGAL DISCLAIMER

The above represents a general overview of the legal regime of real estate transactions in Bulgaria as of January 2007. It does not constitute legal advice and cannot be relied upon as such. Everyone should contact a lawyer for professional advice for his own particular circumstances.



               
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