13 Jul VAT issues by purchasing a real estate property in Bulgaria

13.07.2024 г.

author: attorney-at-law Doychin Ivanov

 

Buying real estate property is a real adventure. For most people this adventure happens to them once, twice or may be three times in their whole life, while for others the procedure is quite familiar due to their more active behavior in the market.

 

And yet, no matter how much experience a person has in the subject, one should always pay attention to even the smallest details, because as the popular wisdom says – “Small pebbles turn the car.”

 

The topic of this article is to present the most general information about the issues related to VAT in the purchase of real estate property in Bulgaria.

 

Now, let’s see what the basics are.

 

I. General remarks on the definitions

 

First of all, we will divide the subject of real estate transactions into the following groups:

• Land
• Buildings

 

In turn, we will consider the land in the following two groups:

• Agricultural land and land properties within the construction boundaries of settlements that are not regulated land plots (RLP)
• Regulated land plots (RLP)

 

As for the buildings, we will also distinguish the following two groups:

• New buildings
• Buildings, which are not new

 

A legal definition of new building is contained in § 1, Item 5 of the Additional Provisions of the Bulgarian VAT Act, where the following is stated:

 

“New buildings” are the buildings:

1. a) which, on the date on which the VAT for their supply became due, are at the “rough construction” stage of completion, or
2. b) for which, on the date on which the VAT for their delivery became due, 60 months have not elapsed, counted from the date on which a permit for use or a certificate for putting into operation was issued in accordance with the Spatial Planning Act, or
3. c) which meet the following conditions:
4. aa) represent parts separated as independent objects of existing buildings as a result of an upgrade and/or additional construction, and these parts may be the subject of separate deliveries or represent buildings for which the direct costs incurred for reconstruction , major renovation and/or remodeling are not less than one-third of the market price of these buildings on the date on which a new permit for use or a certificate for putting into operation was issued in accordance with the Spatial Planning Act, and
5. bb) as of the date on which the VAT for their delivery became due, 60 months have not elapsed, counted from the date on which a new permit for use or a certificate for putting into operation was issued in accordance with the Spatial Planning Act.

 

In the more widespread cases, the above-mentioned legal definition of New buildings can be reduced to the following conditions – buildings that have at least reached the stage of “rough construction” and for which no more than 5 years have elapsed, counted from the date of issuance of the Permit for use or the Certificate for putting into operation of the building.

 

II. Deals with land plots

 

1. VAT exempted supplies

 

Pursuant to Art. 45, Para. 1 of VAT Act, the supplies listed below are exempt from VAT:

• the transfer of the ownership right to land
• the establishment or transfer of limited real rights over land
• the leasing of land

 

Pursuant to Art. 45, para. 2 of the VAT Act, the establishment or transfer of the right to build is considered an exempt supply under para. 1 until the time of issuing a Construction permit for the building for which the construction right is established or transferred.

 

I open a parenthesis here to clarify that the owner of a land property can establish a limited right in rem in favor of a third party. This is the so-called surface. After that, in order to actually start the construction process, the holder of the real right of construction (the surface) should prepare an investment project, which should be approved by the relevant municipality and based on this project, a Construction permit should be issued.

 

Transactions for the transfer of ownership rights or the establishment and transfer of other real rights on the adjacent land to buildings or parts of buildings that are not new will not be subject to VAT. This follows from the rule of Art. 45, para. 3 of VAT Act.

 

2. Taxable supplies with VAT

 

Pursuant to Art. 45, Para. 5, item 1 of the VAT Act, however, transactions on the transfer of ownership rights to Regulated Land Property (RLP) within the meaning of the Spatial Planning Act are subject to VAT, with the exception of land adjacent to buildings that are not new.

 

Under § 5, item 11 of the Additional Provisions of the Spatial Planning Act “Regulated Land Property” or “Regulated Property” is land property for which a detailed development plan defines boundaries, access from a street, road or alley, specific purpose and regime of development.

 

III. Deals on buildings

 

1. VAT exempted supplies

 

Pursuant to Art. 45, Para. 3 of the VAT Act exempt supply is also the supply of buildings or parts of them that are not new. As mentioned above, in order for a building to be defined as not new, the following conditions must be met for it – it must be officially put into operation for a period of more than 5 years.

 

For example, if a seller offers you an apartment for sale in a building that has been put into operation for more than 5 years, then regardless of the price and regardless of the quality of the seller, i.e. regardless of whether a person is registered for VAT or not, this transaction will not be subject to VAT. In this case any adjacent ideal parts of the land on which the building is built shall also be VAT exempt supplies.

 

2. Taxable supplies with VAT

 

According to an argument to the contrary based on Art. 45, Para. 3 of VAT Act follows that supplies with the subject of new buildings are taxable supplies with VAT.

 

Above I indicated the conditions under which a building is considered new. Here I will explain some additional features.

Why do we talk about “rough construction” when introducing the conditions for a new building? This is because in the construction process, before reaching the “rough construction” stage, we cannot yet speak of an existing object or building at all. The concept of “rough construction” in building construction generally means the completion of the building construction, i.e. bearing columns and slabs.

As for the moment of final completion of the construction of the buildings in Spatial Planning Act, two regimes are observed.

Pursuant to Art. 177, Para. 2 of the Spatial Planning Act, constructions of the first, second and third categories are put into operation based on a Permit for use issued by the authorities of the Directorate for National Construction Control. Here the procedure is more complicated. In order to issue the Permit for use, a state acceptance commission is appointed, which performs an on-site inspection and only after confirming the actual implementation with the project documentation, the Permit for use is issued.

 

Pursuant to Art. 177, Para. 3 of the Spatial Planning Act, constructions of the fourth and fifth categories are put into operation on the basis of a Certificate for putting into operation from the authority that issued the Construction Permit. In this case, the procedure is simplified, and as a rule, the Certificate of Commissioning is issued on the basis of a submitted application and an attached set of relevant documents. Only under certain circumstances, at the discretion of the relevant administrative authority, an on-site inspection may also be carried out.

 

Transactions with adjacent land to new buildings are also subject to VAT.

 

In this regard, under § 1, item 6 of the Additional Provisions of VAT Act “Adjacent land” is the sum of the built-up area within the meaning of the Spatial Planning Act and the area around the built-up area, determined on the basis of a distance of 3 m from the outer outlines of each from the enclosing walls of the first above-ground floor or the semi-underground floor of the building, within the regulated land property.

 

In other words, if a seller offers you an apartment for sale in a building that has been put into operation for less than 5 years, then this transaction will be subject to VAT. The same applies to possibly adjacent ideal parts of the terrain on which the new building is built.

 

 

The team of the Ivanov & Yonkova Law Firm is available to provide answers to additional questions on this, as well as on other topics that are important to you.

 

This article is based on the current Bulgarian legislation at the date of its publication and does not constitute a legal opinion or advice related to a specific situation or case.

 

Author: attorney-at-law Doychin Ivanov

Managing Partner at Ivanov & Yonkova Law Firm