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Tax residence in Bulgaria is determined largely by one simple rule – if you spend more than 183 days a year in Bulgaria, you are regarded as being resident there for tax purposes.

Tax Residence in More than One Country

Remember that you can be a tax resident in more than one country under the respective rules of those countries. For example, you might spend 230 days of every year in Bulgaria and 135 days in England. In this case you could end up, under the rules of each country, being responsible for paying the same tax in two or more countries.

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This would be unfair, so many countries have signed reciprocal double taxation treaties, and the UK and Bulgaria have such a treaty. It contains ‘tiebreakers’ and other provisions to decide, where there is the possibility of being required to pay tax twice, in which country any particular category of tax should be paid. The basic principle of the double taxation treaty is to protect people from being taxed twice for the same activity.

Decisions to Make about Residency

The most basic decision that you will have to make when planning your tax affairs is whether to cease to be resident in the UK, whether to cease to be ordinarily resident here and whether to change your domicile to another country. Each of these has many consequences, many of which are not obvious.

The second consideration is when in the tax year to make these changes.

For many ordinary people, getting these decisions wrong can lead to unnecessary extra taxation and a great deal of aggravation and inconvenience. It is vital that you seek proper professional advice from specialist lawyers, accountants or financial advisers, all of whom should be able to help you.

Taxes Payable in the UK

The significance of the residence rules is that you will continue to be liable for some British taxes for as long as you are either ordinarily resident or domiciled in the UK. The decision on your UK tax residence will be determined by the information you provide to the authorities.

Broadly speaking, if you leave the UK to live in Bulgaria:

• You will continue to have to pay tax in the UK on any capital gains you make anywhere in the world for as long as you are ordinarily resident in the UK – i.e. spend more than three months there in any one year-or domiciled in the UK. If you go to live permanently in Bulgaria with no intention of returning, and inform the UK authorities, you can apply to no longer be considered domiciled, though changing your domicile is very difficult.

• You will continue to be liable for UK inheritance tax on all of your assets located anywhere in the world for as long as you remain domiciled in the UK. This will be subject to double taxation relief. Other, more complex rules also apply in certain circumstances.

• You will always pay UK income tax (Schedule A) on income arising from land and buildings sited in the UK – wherever your domicile, residence or ordinary residence.

• You will pay UK income tax (Schedule D) on the following basis:

• Income from ‘self-employed’ work carried out in the UK (Cases I and II) -normally taxed in the UK if income arises in the UK.

• Income from interest, annuities or other annual payments from the UK (Case III) – normally taxed in the UK if income arises in the UK and you are ordinarily resident in the UK.

• Income from investments and businesses outside the UK (Cases IV and V) – normally only taxed in the UK if you are UK domiciled and resident or ordinarily resident in the UK.

• Income from government pensions (fire, police, army, civil servant, etc.) – in all cases taxed in the UK.

• Sundry profits not otherwise taxable (Case VI) arising out of land or building in the UK – always taxed in the UK.

• You will pay income tax on any income earned from salaried employment in the UK (Schedule E) only on any earnings from duties performed in the UK unless you are resident and ordinarily resident in the UK – in which case you will usually pay tax in the UK on your worldwide earnings.

If you are only buying a holiday home and will remain primarily resident in the UK, your tax position in the UK will not change very much. You will have to declare any income you make from your Bulgarian property as part of your UK tax declaration. The calculation of tax due on that income will be made in accordance with UK rules, which will result in a different taxable sum from that used by the Bulgarian authorities.

Since your property is located in Bulgaria.you will also have to pay taxes to the Bulgarian tax authorities. The taxes you will have to pay are discussed below. The UK Inland Revenue will give you full credit for the taxes already paid in Bulgaria. On the disposal of the property, you must disclose the profit made to the Inland Revenue, which again will give full credit for Bulgarian tax paid. Similarly, on your death, your assets in Bulgaria must be disclosed on the UK probate tax declaration but, once again, you will be given full credit for sums paid in Bulgaria.

The biggest single factor in determining how you will be treated by the tax authorities in any country is whether you are resident in the country for tax purposes. This concept of tax residence causes a great deal of confusion and can have different meanings in different countries.

Let us first look at what it does not mean. It is nothing to do with whether you have registered as a resident in a country or whether you have obtained a residence permit. Nor does it have anything to do with whether you have a home (residence) in that country – although a person who is tax resident will normally have a home there.

Tax residence is a question of fact. The law lays down certain tests that will be used to decide whether you are tax resident or not. If you fall into the categories stipulated in the tests, then you will be considered tax resident whether you want to be or not, and whether it was your intention to be tax resident or not.

It is your responsibility, if required, to make your tax declarations each year. The decision as to whether you fall into the category of resident is, in the first instance, made by the tax office. If you disagree, you can appeal through the courts. Because people normally change their tax residence when they move from one country to another, the basis on which decisions are made tends to be regulated by international law and to be reasonably, but not totally, consistent from country to country.

You will have to consider two different questions concerning tax residence:

• Whether you will be treated as tax resident in the UK.
• Whether you will be treated as tax resident in Bulgaria.

Tax Residence in the UK

There are some basic points of UK taxation law that you should understand in order for an explanation of Bulgarian taxation to make any sense. In the UK there are two tests that will help determine where you pay tax. They assess your domicile and your residence.

Your domicile is the place that is your real home, the place where you have your roots. For most people it is the place where they were born. Changes in domicile can have far-reaching tax consequences and can be a useful tax reduction tool. If you move permanently to Bulgaria, when dealing with the UK authorities you should indicate that Bulgaria isyour new home and they should consider you as not domiciled in the UK any more.

Residence falls into two categories. There is a test of simple residence – actually living in a country permanently rather than temporarily – and of ordinary residence. A person will generally be treated as resident in the UK if he or she spends 183 or more days per year in the UK. A visitor will also be treated as resident if he or she comes to the UK regularly and spends significant time here. If he or she spends, on average over a period of four or more years, 91 or more days per year here, he or she will be treated as tax resident. A person is ordinarily resident in the UK if his or her presence is a little more settled. The residence is an important part of his or her life. It will normally have gone on for some time. A person can continue to be ordinarily resident in the UK even after he or she has stopped actually being resident here.

The most important thing to understand is that, once you have been ordinarily resident in this country, the simple fact of going overseas will not automatically bring that residence to an end. If you leave this country in order to take up permanent residence elsewhere then, by concession, the Inland Revenue will treat you as ceasing to the resident on the day following your departure. But they will not treat you as ceasing to be ordinarily resident if, after leaving, you spend an average of 91 or more days per year in this country over any four-year period. In other words, they don’t want you to escape too easily!

Until 1993 you were also classified as ordinarily resident in the UK if you had accommodation available for your use in the UK even if you had spent 364 days of the year living abroad. This very unfair rule was cancelled, but many people still worry about it. It is not necessary to do so, provided you limit your visits to the UK to fewer than the 91 days referred to above.