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@Lisa PD

Good luck with your house purchase!

I would personally be a bit miffed if the developer didn't really lower the price, that's not much of a negotiation! :-)

But perhaps he has actually given you a discount? As most new property is sold as "Bulgarian standard" (i.e. unfinished), and you say that he will be doing both "finishing works" and "furnishing". If he's actually doing the finishing works and the furnishing then that represents quite a discount. If he's not doing any finishing or furnishing, then he's (a) not given you any discount, and (b) he's simply relabelling the costs in order to reduce the effective selling price, and pay less VAT.

It is, of course, officially illegal to under-declare a property transaction in this way. But it's very common, and often hard to avoid, even with larger developers. And, in practice, I don't think there's much risk associated with doing it. The developer is somewhat overstating it as "perfectly legal", but I'd accept it if he said "totally commonplace".

Separately, I don't actually know the VAT rules on property sales, but I purchased a brand new apartment and, as far as I recall, there was no mention of VAT. So I'm curious about which situations require it. Although perhaps it's because you're British (non-EU) and you're buying a house, and hence it's a side-effect of using a company for the purchase.

What's the impact? If you pay (I'll use some nice round numbers) 200,000 euros for a house, then VAT is 20% (usual rate, maybe there's a reduced rate for new property) or 40,000. That's 240,000 euros. As the buyer, you'll also pay the notary costs and the transfer tax, which are effectively another percentage of the purchase price: approximating at 10% would be another 20,000 (or maybe 24,000). That's 260k ish cost to you, with 200k ending up in the developer's greedy mits.

On the other hand, if you give the developer 50,000 in cash (black money), and agree to 50,000 of finishing and furnishing, then your purchase price is now 100,000 euros. With 20,000 of VAT, and 10,000 (or 12,000) of notary/transaction costs. Now it's 120,000 + 10,000 + 50k + 50k cost to you (230k, saving 30k ish), and the developer still gets 200k.

The developer gets the same money (so no discount given) and probably saves on his income tax on the profit too. 50k costs on 200k sale = 15k tax (10% of gain). 50k cost on 100k sale = 5k tax (10% of gain).

You also gain each year, as your property tax is based on 100k (the official sale price) rather than 200k (the actual price).

The downside comes when you sell the property in a few years. You bought for 200k, so you hope to sell for 250k, a 50K gain, and 5k income tax (10% of gain). But if you under-declare now, the official purchase price is 100k. So your gain would be 150k, or 15k income tax.

10k more when exiting, while initially underdeclaring saves 30k (that would worth more later with actualization) in this case. Still a win with a favorable net 20k for you.

(Then when resale, buyer might be interested to pay with some cash, hence decreasing future income tax.)

Not so bad.

Cherry on top would be a real discount from the developer now to trigger signature.

How about interest rates in Bulgaria for real estate currently? Did they raise?

With a cross effect of inflation on material and energy, the stock of potential buyers should have mathematically diminished, giving you purchasing power in the nego.

Unless demand is so strong and nobody needs credit, a last discount seems obtainable, no?

@gwynj Thank you SO much for your detailed reply. Are you reading my mind? LOL. The developer wanted 240k plus VAT for the house. I offered him 220k plus VAT. The house will be finished and furnished.

He offered to discount to 235k plus VAT but I said I couldn't go higher than 220k. He then came back with 150k plus VAT for the house (plus land)  and the remaining 85k (his 235k final proposal) to be split as follows: 40k for furniture and 45k for finishing works (no VAT on either).

I really like the house, but am not going to lose any sleep if I don't buy it - just don't want to jeopardise my existence as a guest in this country by doing something dodgy.

I did a bit of reading and in the case of apartments over 5 years old, there is no VAT, but on new apartments, there IS VAT, ditto for new houses. Also post Brexit, UK nationals are not permitted to buy land as an individual but must buy it through a company.

I'm not sure he's being particularly 'greedy' - I think costs really HAVE risen in terms of materials and labour.

Thanks again for your advice and if anyone else has something to add, I'd be really grateful for any input

@Manomelco

Exactly, there's a larger saving now for the buyer... plus cheaper property tax while they own the property. With a smaller penalty many years in the future. And the developer saves a bit on his income tax too. And, as you say, you can often reduce the future penalty by getting your future buyer to hand over some cash too. So this is probably why this is popular, and why it has kept going despite efforts to stamp it out.

@Lisa PD

You're right, it's probably not fair for me to call the builder greedy. :-)

He is agreeing a discount (5k on 240k is about 2%, which maybe doesn't seem like much). But there is a lot of demand for property right now, and costs have definitely gone up a lot (inflation is still close to 20%). So developers are probably not doing much discounting.

Finishing AND furnishing is expensive, so that's quite a chunk of money too. I'm currently working on my new apartments in Plovdiv (delivered in Bulgarian Standard as usual), and I've been shocked by the huge amount it has cost me. Fitted kitchens are particularly expensive, I've had quotes of 4k-6k euros (with sink and appliances another couple of grand). Not only is this a very big cost, but it's a huge headache to deal with it all. If your developer will handle all this (and maybe even give you some choices on the materials / colour scheme), that could be very appealing to you. Especially, if you've seen examples of their finished houses and you know they're doing good quality/contemporary design.

I don't know where you're buying (or how big your house is), but, as an example, Plovdiv (2nd city, former European Capital of Culture) is booming. A couple of years ago, brand new apartments (Bulgarian Standard) were being sold off-plan at 1,000 euros/m2. Now many are at 1,500 euros and up. Recently, I got an unsolicited offer for one of my apartments at 1,800 euros. To do finishing works maybe another 300-400 euros/m2, and this is not going for fancy designer stuff.

A popular village close to Plovdiv (Markovo, just 5km away and in the foothills of the Rodopes, very nice) has a lot of new houses being built. These houses are being sold at around 1,500 euros / m2 and this, again, is only for Bulgarian Standard. So in this area, I wouldn't be surprised to see a 120m2 house go for 180k, with another 50k ish needed for finishing.

The "dodgy" deal only came about during the haggling, in this case. So you can easily avoid it by not pushing for a discount. But it's so common I doubt if any Bulgarians are losing sleep about doing it.