Claiming back the VAT on your Bulgarian property.

Many property investors have ventured into the acquisition of a Bulgarian property with a clear ‘buy to let’ strategy in mind. In approximately 80% of cases, buyers have expressed the intention to use the property for their own personal benefit (holidays) for a couple of weeks per year and then rent it for the rest of the time, clearly with the intention to generate profit.
The concept is absolutely viable, however most buyers fail to realise that what they are creating is a legitimate rental business and properly configured it can generate some significant tax benefits. An area that should be considered by anybody when purchasing a holiday/ rental property is the VAT implication.
Any property purchased from a professional development company is a ‘Vatable’ product. In the case of Bulgarian tax law VAT is charged at 20% which represents a substantial part of the total purchase price. If you purchase in your name personally you are becoming the final consumer in the VAT sequence and as such you are the one who absorbs the VAT. However, if we assume that your intention is to use this property as a commercial asset to generate revenue and profit, then by law you can setup a Limited company which owns the property and invoices clients who rent it from the company. Looking ahead your company can become VAT registered and legitimately make claim for the return of the VAT that was paid to the developer upon acquisition.
The scheme sounds nice and easy but it also has downsides. Being a VAT registered business any profits that derive from the property are also going to be Vatable. In other words, the rent that you are going to be receiving will have to include 20% VAT payable to the government, in effect you will lose 20% of all rental income. Furthermore, the administration of the VAT process requires a professional accountancy and or consultancy company to deal with the business on a daily basis. Naturally, there are ongoing costs involved here too, however the amounts pale into insignificance by comparison to the sums collectable from the VAT refund, as such it is worthy structure with plenty of benefits. For some investors it may be also too late; once you have transferred the ownership of the property into your personal name then you have already paid the VAT to the government and any VAT reclaim is no longer and option.
As per the above it is obvious that the VAT claim is not beneficial for all the Bulgarian property buyers. This is especially true when the nominal value of the purchase is low as the expense involved in claiming back any VAT could outstrip any potential gains, thus rendering the whole exercise ineffective. However, for people who are in the process of purchasing properties with substantial value and especially those with more than one property, it is very advisable to consider the concept in detail and speak with a professional consultancy about the possible benefits.
In conclusion, if you are a property investor active in the Bulgarian market do not hesitate and contact your accountant and you may be pleasantly surprised to hear that you could soon have 20% of the investment back in your pocket. For more details, please contact the author via www.newestate.biz in London on +44207 9934197 or Sofia on +35929632936.