Dual Pricing for tax purposes- a practical example!!

We don't like them but we gotta pay them! How does it work in Bulgaria?

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YirMan
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Dual Pricing for tax purposes- a practical example!!

Postby YirMan » Tue Jul 12, 2005 5:35 pm

During my visit to Bulgaria about 3 weeks ago, I had a look at the Sun City development which is at the southern end of Sunny Beach about 1km from Nessebar. For the benefit of those who have bought there it is a quality development, which I think will increase in value more than most.

I was interested in a 1-bedroom apartment but unfortunately they had all gone during my visit.

However, a 1-bed apartment did become available last week (6 July) at an increased price from those I had seen originally, nonetheless I decided to follow it up…but not anymore, let me explain why.

The price of the apartment (B26) is 89,000 Euros, which I was prepared to pay, because it is now ready for occupation. It has a fully fitted kitchen, bathroom and also has the benefit of a washing machine. All of the purchase price would have to be paid immediately but to my disappointment the developer/builder is only prepared to put a selling price of 45,000 Euros on the Notary Deed. An under-declaration of its real value of 44,000 Euros.

This means that before I even occupy the property and according to the "official" paperwork (the Notary Deed) I will be showing an immediate "profit" of 44,000 Euros, on which I will have to pay Capital Gains Tax when I come to sell.

The law in Bulgaria says that if I keep the property for 5 years, I have no liability for CGT, but that could change, especially since Bulgaria is likely to join the EU and may be obliged to "reform" some of its tax laws. And why shouldn't they in this instance, because the majority of people who will have to pay the tax would be non-Bulgarians, a popular move at home I should think.

OK you say, this is how things work in many other countries of mainland Europe. That may well be so, but in all of the other countries where it operates, e.g. Spain, Spaniards buy and sell houses/flats too, but the nationals of Bulgaria do not, because almost all Bulgarians already own their own homes, one of the few benefits provided by Communism. This situation is unlikely to change within the next 10 years or so, certainly as far as the value of the properties we Brits are buying!!.

The other option of course is to find a compliant Brit to sell on to but that won't be easy when he works out the possible tax ramifications for himself.

Don't forget also that even if the Bulgarians do not change the CGT laws in the meantime, and whether or not you retain the property beyond 5 years before you decide to sell, you still have to pay CGT in the United Kingdom.

If you remain domiciled in the UK, as I would, you'd still be liable for UK CGT, so say I sold the Sun City apartment after 5 years for 130,000 Euros, my CGT liability would be on 85,000 Euros instead of 41,000 Euros. In the UK CGT is payable on profit at the rate of 40% so my CGT bill would be 34,000 Euros instead of 16,400 Euros - quite a significant difference.

Effectively, whether this practice is legal or not, I (or you) end up paying the developer's tax liability.

I am still keen to buy in Bulgaria, it is a beautiful country with wonderful weather and wonderful people but this practice could prevent myself and many others from bringing much needed investment to the country.

Based on all the discussions on the many threads on this web site, I can see no practical way around this dual pricing. If you can find a legal way do let us know, myself and many others would love to hear.

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Postby poulton » Tue Jul 12, 2005 6:45 pm

Unfortunately 90% of sales are done this way, and many sellers know if you don't agree to it, someone else along the line will.
Whilst not very British, some would say who the hell are we, to tell them how to change their customs - in their country.
Looking at it from another perspective - Spain & Italy have been in the EU for decades with similar shady practices, and they haven't changed their ways.
Last edited by poulton on Tue Jul 12, 2005 7:41 pm, edited 1 time in total.

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Postby Tony » Tue Jul 12, 2005 7:22 pm

I would agree in saying "who the hell are we to change their customs" BUT not in the cases of private appartments built from new by very wealthy developers.
Lets face it you have to have a fair amount of cash to build aappts and sell them on on so why should the rich capitalists take even more money from the taxes of the Bulgarian people.
This might sound like a double standard as I agree with the way the average people conduct themselves in this way.
After all those poorer villagers who sell their houses would have a major shock when being presented with the CGT !! It is also the case that they "earned" their houses which they now sell on.
Then there is the agent who tells the villager that they are going to sell their house at one price any then "hike the price up" to a wealthy buyer.
Do they put the real price on the deeds....no !
Until the system and law changes to drag everyone in line we are just stuck with the way it is.

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Postby YirMan » Wed Jul 13, 2005 4:51 pm

I understand and appreciate that most sales are conducted in this manner but all I was trying to do was make other potential buyers aware of this as an issue when they come to sell. There are so many Brits buying in Bulgaria it makes me wonder just how many of them actually understand the dual pricing scam until they are so committed to the purchase that it is too late to pull out. It is a scam pure and simple - a tax avoidance scam - and by avoiding the payment of tax, the developer/builder or whoever is selling to you, is passing that tax debt on to you, the buyer.

I agree also that it has been going on In Spain/Italy for many years but the point is that the Spaniards and Italians themselves buy and sell "high-ish" value homes to their own nationals, as well as foreign investors in their respective countries. Everyone knows the tax dodge and plays along with it and everybody's happy. But what is not in the mix in Bulgaria is that the Bulgarians will not be buying the "high-ish" value homes that we own when we come to sell. Hence the likelihood that you will have to find a compliant Brit to go along with you in the scam when you want to move on, as if selling a house wasn't difficult enough!!

Tony I agree with you in that we should not be trying to change the customs/practices of the local Bulgarians. I wholeheartedly agree with your posting, " why should the rich capitalists take even more money from the taxes of the Bulgarian people". In the instance I described in my earlier posting, regarding the Sun City development, the company behind this project is not even a rich Bulgarian developer but a Turkish company. Also, in another of the biggest developments in the St Vlas area where I would like to buy, they too want to put a different (read lower) price on the Notary Deed, and they are a British company.

These foreign companies are lining their own pockets at the expense of others and using this scam for their own selfish interests. By operating in this way, they are ripping everyone off by avoiding payment of these state taxes into the Bulgarian economy. They do nothing to assist the local Bulgarians, and are taking advantage of the primarily British buyer by passing their tax burden on to them.

I am happy (as you can be) to pay the taxes due to me, but I don't want to be paying anyone else's taxes.

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Postby imcneill » Wed Jul 13, 2005 7:24 pm

I both agree and disagree with what the original poster said. certainly, the situation is, as has been laid out, but there is a little bit missing.

On new property, vat is chargeable to THE BUYER, based on the value written in the notary deed, and it is THE SELLERS duty to collect and pay the vat. Therefore your 89,000 Euro apartment, is only 89,000 Euro because the seller is putting 45,000 or whatever on the notary deed and paying vat at 20% on that, on your behalf, so there is a 20% saving to you, the buyer, on the difference between the real and notarised price of the apartment.

So the real price you are paying is subsidised by the fact that less vat is being paid. On the other hand, when you go to sell, (assuming after 5 years) you'll have a CGT component to pay at 40% of the profit, less any CGT relief/tapering you are entitled to. I am sure if you stamp your feet, your builder/developer will agree to the full value on the deed, but will insist you pay the full vat price (you might well find your preliminary contract states that the buyer is liable for all local taxes). However in most cases you probably end up better off in the long term doing just that.

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Postby balkankiwi » Thu Jul 14, 2005 5:11 pm

On new property, vat is chargeable to THE BUYER, based on the value written in the notary deed, and it is THE SELLERS duty to collect and pay the vat. Therefore your 89,000 Euro apartment, is only 89,000 Euro because the seller is putting 45,000 or whatever on the notary deed and paying vat at 20% on that, on your behalf, so there is a 20% saving to you, the buyer, on the difference between the real and notarised price of the apartment.


I suggest this argument is misconceived. Certainly in NZ, and I believe UK - so let's assume also BG - vat is a tax levied on the sale price of the taxable item. The legal obligation to pay it is on the seller not the buyer. Indeed with many items sold, the amount of vat is not separately disclosed - the buyer knows (or assumes) its included in the price but is indifferent to whether its paid or not.

Ok, for sure the amount of vat paid on the sale of this apartment is reduced - we can assume - because the sale price is understated by 50% or so. But the benefit goes to the seller not the buyer. And its not valid to say that the sale price would have been higher than 89,000 euro if the full impost of vat had to be paid. The buyer is entitled to assume that the agreed sale/purchase price includes any vat payable by the seller and the buyer could - at least in NZ - legitimately refuse to pay any extra for vat if the seller had not declared pre-sale that the sale price excluded vat.

OP is absolutely correct - the insistence on understating the real sale price is purely for the benefit of the seller - both to reduce its vat impost and its income tax liability. There is no moral justification for buyers - Brits or otherwise - agreeing to it. Only greed.

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Postby YirMan » Thu Jul 14, 2005 5:12 pm

Dear imcneill thank you for your response but please no more misleading comments, this issue is cloudy enough.

The 89,000 Euros purchase price actually includes VAT in the selling price. Yours is a poor argument used by some builders and developers to confuse the issue further. What you are insinuating is that every price we see against an advertised property, does not include 20% VAT?…I don't think so!!

The Seller is certainly not paying tax on the Buyer's behalf, he is avoiding paying the tax on his own behalf. He under-declares the value of the property on the Notary Deed so that he pays a lot less tax, not the Buyer.

But lets just assume for argument's sake that in the example previously mentioned, VAT is to be payable on the declared price of 45,000 Euros at 20%. That is 9,000 Euros plus the declared price of 45,000 Euros - a grand total "paid" on the Notary Deed of 54,000 Euros. But the actual amount of money handed over was 89,000 Euros, therefore there is still a shortfall of 35,000 Euros.

When you come to sell, that 35,000 Euro shortfall is seen as the Buyer's profit because it's the price on the Notary Deed that is the seen as the real selling price, not what might have been paid over and above the notarised price. If held for more than 5 years, there is no Bulgarian CGT payable (as the law stands currently) but if you are domicile in the UK, you are still eligible for UK Capital Gains Tax on the difference between the notarised buying price and the selling price at the rate of 40%.

I do however agree with you that this profit can be reduced through CGT relief and any tapering you may be entitled to but this is always true and will always apply.

Like Poulton and Tony said earlier, it is to be understood and accepted (unwillingly maybe) if it's a small time local Bulgarian builder who is making a few bob out of the tax man, but in the two selling examples I gave in an earlier posting in this thread, the sellers are Turkish and British respectively.

They should not be allowed to get away with it!!

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Postby imcneill » Fri Jul 15, 2005 10:12 am

Naturally I can not for 1 second tell folks what is says it their contract, whether it says 89K and you pay no taxes or it says 89K and you pay all taxes, you need to look at your preliminary contract.
I can only speak of what was in my contract, which stated a price, and also said "buyer to pay all local taxes".

To reply to a previous poster, my statement regarding the source and olbigation of the VAt didn't come from me, it came from a Bulgarian lawyer who specialises in commerical law. I guess he could be wrong, but it seems unlikely.

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Postby scot47 » Fri Jul 15, 2005 10:21 am

The fact is that this practice is almost universal in BG. Just one of the problems facing those who wish to come to BG but keep doing things the way they did in the old country.

Culture shock is not just about finding out that there are no Heinz Baked Beans in the shops !

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Postby Chris7 » Fri Jul 15, 2005 10:22 am

On new property, vat is chargeable to THE BUYER, based on the value written in the notary deed, and it is THE SELLERS duty to collect and pay the vat


That's broadly correct imcneill - the way it works (in outline)is as follows:

I buy some bricks, cement, timber etc and it costs me £20K + VAT of £4K so I have to pay the builders merchant £24K

I puild an appartment and sell it for £42K including VAT. This means that the price excluding VAT would be £35K

The purchaser pays me £42K and I have to hand over the £7K of VAT I have collected minus the £4K of VAT I have paid to the builders merchant = £3K to the authorities.

Another way to look at this is that I have spent £20K on materials, and turned them into a £35K appt. So I have ADDED VALUE in the amount of £15K

Calculating the VALUE ADDED TAX at 20% on this £15K of VALUE ADDED gives you the £3K that I have to hand over.

So I guess it's fair to say that it is paid by the purchaser but collected and accounted for by the seller (not that the man in the street would understand it that way)
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