Welcome to BuyAssociation.co.uk

Bulgaria: The Buying Process

Overview

The purchase procedure for buying a home in Bulgaria is slightly different from that in most Western countries. Although relatively straightforward, the procedure isn’t without potential problems and it’s therefore highly advisable to engage a lawyer who’s familiar with it before paying any money or signing a contract.

Once you’ve found a home you plan to buy and agreed the selling price, you will need to take the following steps:

1. If the property has land (i.e. is anything other than an apartment), form a limited company.

2. Sign a preliminary contract and pay a deposit.

3. Sign the notary act and make the final payment.

The buying process is generally straightforward and is often completed within a month.

Forming a Company

If you’re purchasing a property that has no land attached (i.e. an apartment or flat) you don’t have to form a limited company; otherwise, you must do so. Bulgarian law currently forbids foreigners from owning land in Bulgaria and the only way around this is to form a company, registered in Bulgaria. This is not illegal or a ‘tax dodge’ but an accepted and recognised practice. The requirement will change once Bulgaria joins the EU, which is scheduled for 2007. According to the latest government information, citizens of EU countries and citizens of non-EU countries that have reciprocal agreements with Bulgaria on land ownership will be allowed to buy land without restriction. Other foreigners will have to wait at least another five years (i.e. until at least 2012) before the requirement to form a company will be lifted.

Normally, you must go to a notary public’s office to sign the requisite documents, but most estate agents can organise company registration for you or you can use the services of a local lawyer, although this requires you to set up a power of attorney.

The process of registering a limited company can take a single day or several weeks but normally takes between three and four weeks, so you should allow at least this amount of time between signing the preliminary contract and completion. Note, however, that a streamlined registration procedure is due to be introduced in October 2006, when a new Registry Agency will be formed; this may also reduce and standardise the cost of registration. Existing companies will have to re-register with the new agency.

The cost of registration currently varies between regions, ranging from around €500 to around €750. (Some agents offer an accelerated registration service, but this can double the price!) Although it may cost a little extra, using a lawyer who speaks your language will make the process much simpler.

The minimum amount of capital required to set up a company is 5,000 lev (€2,500), although you usually need to deposit only 70 per cent of this amount, i.e. 3,500 lev (€1,750). This isn’t the cost of setting up a company but the amount that must be deposited into a bank account in order to set up a company. Once the company has been formed, you can access the money.

You must give your company a name (which will have the suffix ‘OOD’, equivalent to Ltd in the UK or Inc. in the US), determine a registered office address and appoint directors/shareholders. These are normally the buyers themselves, e.g. a husband and wife, although you should check the tax, inheritance and other implications of your choice of shareholders. If you’re a non-EU citizen, your company must employ at least ten Bulgarians, although this can be on a part-time or occasional basis. Following protests by the EU, this requirement was dropped for EU citizens.

Your company must be registered with the National Insurance Institute (NOI) within seven days of its formation and with the local tax authority within 14 days. You will receive confirmation of the company’s registration, a tax registration card (with the company’s tax numbers on it) and a stamp to be used on all official documents.

At the end of the financial year (March) you will need to file an annual tax return for your company. In almost every case your account will be ‘zero’ (i.e. no trading for the entire year). Nevertheless, unless you can read and write in Bulgarian and are familiar with the Bulgarian tax system, you will need a lawyer to ensure that your tax return is filled out correctly; he shouldn’t charge more than 100 lev (€50).

Power of Attorney

Many people are unable to be in Bulgaria for the whole of the purchase process, particularly those buying a holiday home or investment property. If this is your case, you can give power of attorney to your lawyer or estate agent to handle the formation of a limited company and/or the purchase of a property. If you need to provide power of attorney to anyone, it’s essential that you know exactly what it authorises.

Power of attorney can allow unscrupulous people to withdraw money from your bank account without your permission, buy and sell property without your knowledge and commit you to unfavourable contracts.

You can prevent such eventualities by stating exactly what your power of attorney permits and forbids and by setting a time limit for its applicability.

Usually power of attorney allows your lawyer to establish a limited company for you and deposit the initial capital in the account, then pay any fees and withdraw money for the final payment. You can also provide power of attorney to your estate agent to withdraw money from your account to pay a deposit on the property.

You may be sent documents for the provision of power of attorney by your lawyer or an estate agent in your home country. For these to be binding legal documents, you must normally sign them in front of a witness (usually a notary public or lawyer) and pay a fee.

Conveyancing

Conveyancing (the legal term is conveyance, but conveyancing is more commonly used) is the processing of paperwork involved in buying and selling property and transferring the deeds of ownership. In Bulgaria, all legal procedures must be completed before a notary public.

Don’t expect the notary to speak any language other than Bulgarian or to explain the intricacies of Bulgarian property law, for which you will need to engage a lawyer.

Conveyancing includes the following:

 checking the title deed and ensuring the land is correctly registered at the land registry;

 verifying the identity of the vendor(s) and buyer(s);

 checking that there aren’t any restrictions on the transfer of ownership,
e.g. any outstanding debts or a mortgage greater than the selling price;

 establishing the terms of the contract.

A notary checks only planned developments directly affecting a property, such as a road running through the garden, and not those that may affect its value, such as the building of a power plant or waste handling facility nearby.

A notary public won’t necessarily protect or act in your interests, and you should engage a lawyer to ensure that everything is carried out to your satisfaction.

Obviously a new motorway that disturbs the peace of your home would be something of a disaster; on the other hand, upgraded roads or a motorway junction within a few kilometres may improve the value of your home. It’s therefore essential to check local development plans.

Unfortunately, there’s no single office or government department that provides this information, although you (or your lawyer) may be able to contact the relevant public works department and check building projects planned for the area. You could also ask local residents if they know of anything planned that may adversely affect a property.

The main problem is usually unsympathetic or poorly planned development in resort areas along the coast, where your sea view may suddenly become a view of an apartment block. If you do buy an apartment with a ‘sea view’, make sure it’s zoned as a ‘front line’ property (usually along the beach or cliff front). Front line property cannot be built in front of.

Even if you make all necessary checks, zoning regulations may change or the municipal council may decide to build a new road or waste processing facility that will be ‘of benefit’ to the community!

Preliminary Contract

The first stage in buying a home in Bulgaria is the signing of a preliminary contract. Your lawyer is responsible for ensuring that this is drawn up correctly and you shouldn’t rely on an estate agent to do so. While some agents or developers will provide a properly-drawn up contract, some won’t – and unless you’re a Bulgarian-speaking lawyer you won’t be able to tell which is which! For peace of mind it’s recommended that you have the contract drawn up or at least checked by a Bulgarian lawyer.

There are a number of types of preliminary contract, depending on whether you’re buying an existing (built) property or a new property off plan (i.e. yet to be built or under construction).

Buying an Existing Property

The preliminary contract will describe exactly what you’re buying, including the amount of land associated with the property. The contract will also state the amount of the deposit you’ve agreed with the vendor and any conditional clauses. Contracts must be in Bulgarian to meet legal requirements, so you should have a translator with you if necessary. As more foreigners purchase property in Bulgaria, some developers and estate agents are beginning to provide contracts in English, which makes the process easier, but remember that to be legally binding a contract must also be in Bulgarian. Anything written in English isn’t a legal document.

Once the preliminary contract has been signed and the deposit paid, the property should be removed from the market by the seller and the preliminary contract verified by the notary public, who will also check the identity of the seller and buyer. This stage can usually be handled by your estate agent or lawyer if you’ve given them power of attorney, in which case the notary public will also authenticate your power of attorney documents. The notary’s fees for administering the preliminary contract should be included in your estate agent’s fee (but make sure you check this beforehand).

Declared Price

Don’t be tempted by the Bulgarian practice of tax evasion, where the sale price declared to the tax authorities (sometimes euphemistically referred to as the ‘tax estimation price’ or TEP) is lower than the actual price paid for a property. If you’re buying directly from a vendor, he may suggest this, and some estate agents may state that the practice is ‘normal’. New (including off-plan) property is subject to 20 per cent VAT on the sale price. Some unscrupulous developers either don't include VAT in their quoted price or ask you to declare a lower value on the notary deed. The advantage for the seller is that he pays less tax on the profit from the sale.

You will also save money on taxes and fees, but you will have a higher capital gains tax bill if you sell the property and it’s a second home. For example, if you buy a property for €80,000 but declare a value of €50,000, then (if you’re lucky) sell the property a few years later for €100,000, the tax man will see this as a profit of €50,000 and you will be taxed on this amount, not the actual profit of €20,000. What's more, if you’re resident in the UK for tax purposes you will be subject to capital gains tax of 40 per cent on the same amount! If you keep the property for more than five years, your CGT liability will be zero – but don't rely on this law remaining unchanged! To avoid this increased tax payment, you will have to sell the property to someone who is also willing to underdeclare the value of the property ...

In any case, the practice underdeclaring the value of your property is illegal. The authorities can revalue the property and demand that you pay the shortfall in tax, as well as other taxes and fines. If a seller will accept an offer only on condition you underdeclare, you should talk to your solicitor.

Declaring a lower price than the actual sale price of a property is illegal in Bulgaria and you may be prosecuted for tax evasion.

Buying Off Plan

If you’re buying an off-plan property, the preliminary contract should include full details of the property to be built (including a copy of the plans and drawings showing its exact location within a plot or development, the number of rooms and the estimated total living area, and the type of materials to be used in its construction), what extras are included (e.g. swimming pool or parking space), any services to be provided, the timetable for construction, the price (including any possible variations or additions), a schedule of payments, details of penalties for non-completion and circumstances under which the deposit is to be refunded and details of any guarantees applicable.

In an off-plan purchase, payments are spread over 12 to 18 months, depending on when you put down a deposit and when the development is due for completion.

Depending on the agent and developer you’re purchasing from, you may also have to pay a commission on top of the purchase price as well as notary fees and local taxes. In almost every case VAT is included in the quoted price for off-plan property, but you should check. The final contract isn’t signed until building is complete.

Deposit

You will usually be expected to pay a 10 per cent deposit to the seller once you’ve signed the preliminary contract. While this is usually paid in cash, you should be able to negotiate for a bank transfer for larger amounts, which may incur lower charges (check with your bank). In some situations you can pay a small amount of the deposit as a ‘goodwill’ gesture and pay the remainder of the deposit seven to ten days later. The preliminary contract will state the amount and the period in which you have to pay.

You should try to have a clause inserted into the preliminary contract requiring that the deposit be held by a third party until completion. This way, if the seller changes his mind or the sale falls through for any reason beyond your control, you will receive your deposit back.

It isn’t uncommon for sellers to register their property with several estate agents and pull out of a sale if they think they can get a better price from someone else.

Conditional Clauses

One of the main reasons for engaging a lawyer is to protect your interests by inserting any necessary conditional clauses in the preliminary contract, which are of little concern to a notary public. Conditional clauses stipulate requirements that must be met to ensure the validity of a contract. Conditions usually apply to events out of control of the vendor or buyer, although almost anything the buyer agrees with the vendor can be included in a preliminary contract. If any of the conditions aren’t met, the contract can be suspended or declared null and void, and the deposit returned. But if you fail to go through with a purchase and aren’t covered by a clause in the contract, you will forfeit your deposit or could even be compelled to go through with a purchase.

If you’re buying anything from the vendor such as carpets, curtains or furniture that are included in the purchase price, there should be a clause to this effect and they should be listed and attached as an addendum to the contract. Any fixtures and fittings present in a property when you view it (and agree to buy it) should still be there when you take possession, unless otherwise stated in the contract.
There are many possible conditional clauses concerning a range of subjects, including the following:

 obtaining a mortgage (see below);

 obtaining planning permission, e.g. for renovation or improvements;

 confirming that the land area being purchased with a property matches the land register;

 selling another property;

 obtaining a satisfactory building survey or inspection.

Mortgage Clause

A mortgage clause states that a buyer is released from the contract if he cannot obtain a mortgage. It’s a good idea to include this clause, even if you don’t plan to obtain a mortgage, just in case your circumstances change.

A mortgage clause should state the amount, term and interest rate expected or agreed with a lender, plus the lender’s name (if known). If you can’t obtain a mortgage for the agreed amount and terms, you won’t lose your deposit. You must make an application for the loan within a certain time after signing the contract and have a specified period in which to secure it.

If you’re unable to obtain a loan for reasons that could reasonably have been foreseen, you can still lose your deposit.

Completion

Once the preliminary contract has been signed and the deposit paid, the property is ‘sold subject to contract’, as in the UK. It should be removed from the market by the seller and the preliminary contract verified by a notary public (if this hasn’t already been done), who will also check the identity of the seller and buyer and authenticate your power of attorney documents. This stage can usually be handled by your estate agent or lawyer if you’ve given him power of attorney. If you’ve use an estate agent to draw up the preliminary contract (which is common practice for off-plan purchases), this service should be included in his fee.

Your lawyer should now carry out the necessary checks on the property, including verifying the authenticity of title documents, making sure licences and permissions are in order, ascertaining whether there are any debts on the property and observing the terms of the contract. This process can take three to four weeks.

Final Checks

Property is sold on the condition that the buyer accepts it in the state it’s in at the time of completion, so you should be aware of anything that occurs between the signing of the preliminary contract and completion. It isn’t unknown for vendors to remove all the fittings – or even the boiler!

Before signing the final contract, it’s imperative to check that the property hasn’t fallen down or been damaged in any way, e.g. by a storm or the owners.

If you’ve employed a lawyer or are buying through an agent, he should accompany you on this visit (the previous owner should have already vacated the property). You should check off an inventory of the fixtures and fittings and anything that was included in the contract or purchased separately, e.g. carpets, light fittings, curtains or kitchen appliances, and make sure that they’re present and in working order. This is especially important if furniture and furnishings (and major appliances) were included in the price. You should also ensure that expensive items (e.g. baths, basins and kitchen fittings) haven’t been replaced by inferior ones. Any fixtures and fittings (and garden plants and shrubs) present in a property when you viewed it should still be there when you take possession, unless otherwise stated in the contract.

If you find that anything is missing, damaged or isn’t in working order, you should make a note and insist on immediate restitution, such as a reduction in the amount to be paid. In cases such as these the notary can withhold an appropriate amount in escrow from the vendor’s proceeds to pay for repairs or replacements.

If it isn’t possible to complete a purchase, you should consult your lawyer about your rights and the return of your deposit and any other funds already paid.

Signing the Notary Act

Signing the notary act (sometimes referred to as the notary deed, purchase contract or final contract, which is equivalent to a title deed) is the final step in taking ownership of your property. If you’re unable to be present at the signing, you can have your agent or lawyer sign it on your behalf if you’ve given him power of attorney.

The signing of the notary act takes place in front of a notary public, who first checks that all the conditions contained in the preliminary contract have been fulfilled. It’s normal for all parties concerned to be present when the final contract is read, signed and witnessed by the notary, including the estate agent, developer (for new or off-plan property), your lawyer and your translator. Either party (buyer or seller) can give a representative power of attorney. In the case of an off-plan purchase, the final contract isn’t signed until building is complete.

Payment

To make payment of the final amount to the seller it’s preferable to have a bank account in Bulgaria. That way you can transfer the money from your home country to your Bulgarian currency (or local euro) account and withdraw it when you’re in Bulgaria. It isn’t advisable to carry large amounts of cash into Bulgaria (or anywhere for that matter!) and you must declare any amount over 8,000 lev (€4,000) in cash or its equivalent.

Most sellers will be unwilling to accept a payment from your home bank account, as they will usually have to pay a fee for receiving a foreign currency and may be at the mercy of foreign exchange rates. Some sellers will ask for the final payment in cash (usually for smaller amounts), but most will accept payment in the form of a bank transfer, telegraphic transfer or bank draft from a Bulgarian account. If you cannot be present at the signing of the final contract, you can authorise your lawyer or another agent to transfer the money on your behalf. In the case of an off-plan purchase, payment is made in stages.

Registration

When the notary act has been signed, your property must be registered with various authorities. The registration process depends on whether the property has land or doesn’t (e.g. is an apartment).

Properties With Land

Your property must be registered with the National Insurance Institute (NOI) within seven days of your signing the notary act and with the local tax authority within 14 days. Property registration is normally done by the notary between one and three days after the signing.

Properties Without Land

Since early 2006, buyers of property without land (e.g. an apartment) have been required to complete a BULSTAT registration and send it to the Registry Agency within seven days. Previously, property without land didn’t have to be registered and owners were slipping through the tax net. Unless you speak fluent Bulgaria, registration should be done by your lawyer, as all the forms are in Bulgarian, although some agents and developers will do it for you. Registration should cost only around 20–40 lev (€10–20).

Occupancy Permit

All new property (including off-plan purchases) must be issued with an ‘Act 16’ (or ‘Akt 16’) certificate – sometimes referred to as an occupancy permit – by the municipal authority. Under Bulgarian law a property isn’t complete until is has been granted an Act 16 certificate, which confirms that the building has been ‘finished’, i.e. that all electricity, plumbing, insulation, walls, doors and windows have been installed. Your builder or the developer organises the Act 16 certificate.

An Act 16 certificate isn’t to be confused with an Act 15 certificate, which is issued when the basic construction is finished (and usually coincides with one of the stage payments in an off-plan purchase). This does not constitute an occupancy permit.

It’s highly recommended that you write a clause into the preliminary contract that you won’t pay the final instalment on a property until the Act 16 certificate is granted (most reputable developers will include this anyway). That way there is a financial imperative for the developer to complete the project – and you aren’t paying for work that hasn’t been completed.

If you’re buying off plan, the Act 16 certificate must be issued before you sign the notary act, as ownership of an unfinished property cannot be legally transferred.

More pages

Page 1: Overview
Page 2: © Survival Books Limited 2006