Investing through a local entity versus direct investment. As indicated above, a foreign investor can invest in properties in Bulgaria either directly or through a local entity. In the case of a direct investment, the tax treatment of the foreign investors depends on whether or not their activities constitute a permanent establishment. The definition of a permanent establishment under Bulgarian law is very broad: the mere fact that a foreign company owns and rents out property in Bulgaria (except where such activity is carried out through an independent agent) may create a permanent establishment under domestic law. The various tax treaties entered into by Bulgaria usually contain a narrower definition of permanent establishment. If the activities of a foreign person owning real property in Bulgaria do not constitute a permanent establishment, the person will be liable for only 15% withholding tax on the rentals and capital gains, unless an even lower rate is applied under a double tax treaty.
The basis of the taxable income of a company, investing in Bulgarian real property is the gross income derived from the property less tax-deductible, property-related expenses and depreciation. Such expenses include repairs, maintenance, renovation and similar costs and interest on loans used for the acquisition of the property. A Municipal Tax at a rate of 15% of profits is due. This is then deductible in calculating taxable profits which are subject to a flat corporate tax rate of 25%.