Falsifying Property title deeds in Bulgaria and Spain

Noinvite the Sofia News Agency reported yesterday on the common practice sweeping Bulgaria, of submitting false prices on property deeds to save tax.

In Bulgaria if the client is found guilty of having been party to such a deal he could be charged with a fine of up to 1,000 pounds and even imprisonment of up to three years.

The article states that “the practice proves to be common with Bulgarian constructors as well who are trying to avoid VAT, which has to be paid on new build or off plan sales. They offer the potential of putting in a low and false price in order that they do not pay all or any of the VAT due.”

This has been a long-standing issue in countries like Spain, whose second hand property market has been damaged because of this same practice. Many naïve or unsuspecting foreign buyers just seem to accept that this is common practice.

Why is it an issue?

This activity is illegal (tax evasion) and it means that when the buyer comes to sell the property on again, they need to find buyers that are willing to do the same again. If the sellers sell at the market rate and place this on their deeds, they will then be due for a huge capital gains tax bill.

Let me give you an example:

Mr A buys a property from Mr X

The property is bought for €200,000
The price declared on the deeds is €170,000

Mr X receives €30,000 in black money (undeclared to the taxman), which goes towards a new Mercedes SLK
Mr A only has to pay 7% IVA on €170,000 rather than €200,000, which is a saving of €2,100

2 years later:

Mr A wants to sell his property to Mr B

Mr B is not interested in under declaring and Mr A is desperate to sell, so:

As we know property was bought for €170,000 on the deeds

Property is to be sold at €220,000

So Mr A must pay capital gains tax on the following:

$220,000 - €170,000 = €50,000

As a non-resident capital gains tax is charged at 35%

So the amount due to the tax office is: €17,500, which in the scheme of things is more than 10% of the original property price on deed!!

I also haven’t included all the other costs to buying and selling in this example. Mr X is the only party to really benefit from this scenario.

(This is an example and there are many other factors to consider)

I must point out that the Spanish Government is trying to clean up this practice and many lawyers will now advise you that it is unwise to go down this route. However there are still a few bad seeds in the system!

My advice is seek advice from an independent lawyer, try not to use the lawyer that the estate agent or developer recommends.

Have you experienced this first hand? I am aware that property tax evasion is rife in many other countries; please comment if you can add value to this post.