When buying property, foreign nationals often register it not in their own name but in the name of a company. Is it possible to recover VAT in this case?
Foreigners in Bulgaria who are not citizens of EU countries do not have the right to buy land. This rule is easy to get around – it is enough to register a legal entity and complete the purchase in its name. Many people do this, and often not only the plot of land but also the house is registered to the company.
When property is registered to a legal entity, there is a strong temptation to recover the VAT on the purchase. The rate of value added tax in Bulgaria is 20% — when buying expensive property, the amounts involved are considerable. However, it must be borne in mind that VAT can only be recovered if the purchased property is for commercial use. On purchase, the seller must issue an invoice, and the buyer must declare the purchased property as an office or another commercial property. If the apartment, house or plot is not declared accordingly, then later on you will have to not only pay the tax but also pay a fine to the National Revenue Agency (NAP).
It should also be noted that VAT recovery applies only to expenses relating to the main activity – i.e. the activity that accounts for at least 50% of the company’s activity as a whole over the past year.
Registering property as an office also has drawbacks that are worth considering in advance. For example, higher municipal taxes are payable on such properties. The cost of electricity and water may also be higher than for individuals. In some cases, property owned by a company may be seized for debts.
VAT-registered companies sometimes sell property, treating the transaction as a supply exempt from tax, since the property qualifies as “not new” if it is more than 5 years old. Nevertheless, under Art. 79 of the VAT Act, if a tax credit was deducted when the property was acquired and the property was subsequently used for an exempt supply, then tax is payable on the sale (an adjustment of the tax credit used is made).
The tax is calculated using a special formula that includes the amount of the tax credit used when the property was purchased and additional coefficients. Failure to pay the tax in this case constitutes a breach of tax law. Tax may only be avoided if 20 or more years have passed since the tax credit was used. It is also possible to avoid VAT being charged and paid if the company is not VAT-registered and its turnover over the last 12 consecutive months, including the property sale transaction, does not exceed 50 thousand leva. To avoid mistakes, it is better to consult financial specialists in advance. Our company Bulgarian Expert will always provide you with qualified assistance in consultations and will help you properly prepare any transaction.
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