Sale Through an In-Kind Contribution of Real Estate to a Company: When the Structure Is Useful and When It Merely Defers the Tax Effect

An in-kind contribution of real estate to a commercial company is often considered as an alternative to a direct sale. At first glance, the logic seems straightforward: the individual does not sell the property immediately, but contributes it to a company as a non-cash contribution. In return, the individual receives shares or company interests. The company may then sell the property.

This is where the practical misunderstanding arises. At the moment of the in-kind contribution, the individual usually does not receive a cash sale price. Under the Bulgarian Personal Income Taxes Act, no tax is assessed at the date of acquisition of the shares or company interests received in exchange for the non-cash contribution. This, however, does not mean that the in-kind contribution results in a tax-free sale of the property.

After the in-kind contribution, the company becomes the owner of the property. The individual who made the contribution no longer owns the property directly, but holds an interest in the company. If the company later sells the property, the sale proceeds are received by the company, not directly by the individual.

The right question is therefore not only: “Is there tax at the time of the in-kind contribution?” The more important question is: what is the overall tax and practical result — from the contribution of the property to the company to the moment when the person who made the contribution actually receives the funds?

What Is an In-Kind Contribution of Real Estate?

An in-kind contribution is a non-cash contribution to a commercial company. Instead of contributing money to the company’s capital, a person contributes property — for example, an apartment, a house, land, a regulated land plot, a building, a right to build, or an ideal share in real estate.

In return, the person receives shares or company interests. Once the in-kind contribution is registered, the property becomes part of the company’s assets. From that moment on, the company is the owner of the property and may dispose of it in compliance with the law and the company’s internal corporate rules.

This is the key change: the individual no longer owns the property personally. Instead, the individual owns shares or company interests in the company that owns the property.

Why an In-Kind Contribution May Look Attractive

An in-kind contribution is often considered when the owner of a property does not wish to proceed with a direct sale, or when a more organised asset-holding structure is being considered.

This structure may appear attractive for several reasons:

• the property is transferred to a company;
• the company may sell, manage, lease out, or develop the property;
• the individual does not receive a cash sale price at the moment of the in-kind contribution;
• a structure may be created for several properties or for an investment project;
• the participation of several persons may be regulated through shares or company interests;
• under certain conditions, there may be no immediate personal taxation for the individual at the time of the in-kind contribution.

This does not, however, make an in-kind contribution automatically better than a direct sale. In some cases, it is a useful instrument. In others, it creates more procedures, costs, and subsequent tax issues than it solves.

What Is the Tax Effect at the Time of the In-Kind Contribution?

When real estate is contributed in kind, the individual receives shares or company interests in exchange for the non-cash contribution. Under Article 13, paragraph 4 of the Bulgarian Personal Income Taxes Act, no tax is assessed at the date of acquisition of these shares or company interests.

This wording is important. It is not entirely accurate to say simply that “there is no income” or that “the in-kind contribution is non-taxable.” A more precise formulation is that no tax is assessed at the date of acquisition of the shares or company interests received in exchange for the non-cash contribution.

This is a favourable regime at the moment of the contribution. But it does not mean that the entire structure is definitively tax-free.

Where Is the Practical “Trap”?

The practical issue lies in the next steps.

After the in-kind contribution, the company owns the property. If the company sells the property, the sale price is received by the company. These funds belong to the company; they are not personal funds of the person who made the contribution.

For those funds to reach that person, there must be a separate legal basis. The most commonly discussed options are:

• dividend distribution;
• capital reduction;
• liquidation proceeds;
• sale of the shares or company interests;
• a loan or another permissible form, provided there is a genuine basis and proper documentation.

Each of these options has its own tax treatment. For this reason, the in-kind contribution should not be analysed as a one-off transaction. The entire sequence must be reviewed: the in-kind contribution, the subsequent sale by the company, the funds remaining in the company, and the method by which those funds may be received by the person who made the contribution.

Direct Sale or In-Kind Contribution: What Are We Actually Comparing?

In a direct sale, the individual sells the property and receives the sale price personally. If the individual is foreign for tax purposes and the property is located in Bulgaria, it must be checked whether the income is taxable in Bulgaria, whether an applicable double tax treaty exists, and how the tax base is determined.

In the case of a taxable direct sale of real estate by a foreign individual, the tax base is usually determined as the positive difference between the sale price and the documented acquisition price, reduced by statutory deductible expenses. This is why acquisition documents — the title deed, payment documents, bank transfers, and other evidence — may be decisive.

The result is different in the case of an in-kind contribution. The individual does not receive a sale price, but shares or company interests. The property is transferred to the company. If the company later sells the property, the sale price is received by the company. It must then be decided how the person who made the contribution will receive the economic result of that sale.

In other words, the comparison is not simply “10% tax on a direct sale versus no tax on an in-kind contribution.” That would be misleading. The real comparison is between:

• a direct sale and personal receipt of the sale price; and
• an in-kind contribution, a subsequent sale by the company, and a separate transaction through which the funds are received by the person who made the contribution.

Sale of the Property by the Company

If the company sells the contributed property, the taxation of the company must then be considered. The company may realise accounting and taxable profit from the sale, which is taxed under the Bulgarian Corporate Income Tax Act.

At this stage, no mechanical conclusion should be made that the profit is always simply the difference between the sale price and the valuation used for the in-kind contribution. The accounting value, tax value, recognition of the property, potential improvements, expenses, depreciation, and the specific accounting treatment must all be reviewed.

This is one of the reasons why an in-kind contribution requires a preliminary accounting and tax model. If only the first step — the contribution of the property to the company — is considered, the structure may appear more advantageous than it actually is.

The Sale Proceeds Remain in the Company

This is the practical point most often overlooked.

Once the company sells the property, the sale proceeds belong to the company. Even if the person who made the contribution is the sole owner of the company’s capital, that person cannot simply treat the company’s bank account as a personal account.

If that person wishes to receive the funds personally, there must be a legal basis. The usual options are dividend distribution, capital reduction, liquidation proceeds, or the sale of shares or company interests. Each option has different consequences.

Dividend

A dividend is the most recognisable way for a shareholder or company member to receive funds from the company.

However, a dividend may be distributed only if there is distributable profit and the applicable corporate and accounting rules are complied with. Not every amount received from the sale of the property can automatically be paid out as a dividend.

If the company realises profit from the sale, taxation at company level is considered first. Then, if a dividend is distributed to the individual, the dividend tax must also be considered.

If the person receiving the dividend is foreign for tax purposes, the applicable double tax treaty must also be reviewed. The treaty may provide for a limitation of the tax rate or specific conditions for its application, but it should not be assumed automatically that the treaty eliminates Bulgarian taxation.

Capital Reduction

A capital reduction often appears to be the natural next step where the property was initially contributed to the company’s capital. The logic is the following: the property is contributed to the capital, the company sells it, the capital is then reduced, and funds are returned to the person who made the contribution.

This is precisely where a specific tax risk arises.

The Bulgarian Personal Income Taxes Act provides for a special mechanism: where the company sells, exchanges, or otherwise transfers for consideration the property that was the subject of the in-kind contribution and, as a result, reduces its capital and makes a payment in cash or in kind to the person who made the non-cash contribution, for tax purposes the individual is deemed to have sold the property on the date of registration of the in-kind contribution.

The income, however, is deemed to have been acquired by the individual on the date of registration of the capital reduction.

This mechanism is essential. It shows why the in-kind contribution may not trigger tax at the first stage, but may create a tax effect upon a subsequent capital reduction and payment to the person who made the contribution.

For this reason, a capital reduction should not be used mechanically as a “technical” way to extract money from the company.

Sale of Shares or Company Interests

Another option is for the person who made the contribution to sell their shares or company interests instead of the company selling the property.

This is not automatically more advantageous either.

First, the buyer may prefer to acquire the property itself rather than the company. When acquiring a company, the buyer also assumes the company’s corporate history, accounting risks, potential liabilities, and the need for a broader legal due diligence review.

Second, in the case of a sale of shares or company interests, their acquisition price must be determined. It should not be mechanically assumed that this price is equal to the valuation used for the in-kind contribution. In many cases, the relevant value is the documented acquisition price of the contributed property itself, not the valuation used for the contribution.

If that acquisition price cannot be documented, the tax result may be unfavourable.

Third, if the person selling the shares or company interests is foreign for tax purposes, the applicable double tax treaty must be reviewed. Some treaties contain special rules for companies whose value is derived mainly from real estate. For this reason, the sale of shares should not be treated as a universal way to avoid taxation on the sale of real estate.

Liquidation

Liquidation may be relevant if the company was created mainly for a specific structure and has no further function after the property is sold.

However, liquidation is not a quick technical step. It involves a formal procedure, deadlines, accounting, settlement of liabilities, deregistration, and a separate tax treatment of liquidation proceeds.

If it is clear from the outset that the company will not have a long-term function, it must be assessed whether all costs related to incorporation, the in-kind contribution, maintenance, sale, and liquidation make economic sense.

VAT on the In-Kind Contribution and the Subsequent Sale

VAT is not the main issue in every structure involving an in-kind contribution, but it should not be overlooked.

If the property is a new building, a regulated land plot, a right to build, or part of an active business activity, the VAT analysis may be significant. The distinction between a new building and a building that is not new is relevant primarily for VAT purposes, rather than for the personal income taxation of the individual.

There is also an additional practical issue in the context of an in-kind contribution: if the property is contributed by a person registered for VAT, the receiving company may fall within a mandatory VAT registration regime. This issue should be checked in advance, especially where the property has been used in an economic activity or where input VAT has been deducted.

In a subsequent sale by the company, the following should be reviewed:

• the type of property;
• whether the building is new or not;
• whether there is a regulated land plot;
• whether there is a right to build;
• whether the supply is taxable or exempt;
• whether there is an option to tax;
• whether input VAT adjustments may apply;
• whether the company is, or must be, registered for VAT.

This review is particularly important for investment properties, development projects, new buildings, and properties used in business activity.

Local Tax and Fees

One argument in favour of an in-kind contribution is that non-cash contributions to the capital of a commercial company may be exempt from local acquisition tax. This may be relevant for high-value properties.

This effect, however, should not be considered in isolation. Even where local tax is saved at the time of the in-kind contribution, this must be compared with all other costs:

• valuation of the non-cash contribution;
• legal preparation;
• notarisation;
• registrations;
• accounting services;
• annual financial statements;
• corporate resolutions;
• potential VAT registration;
• subsequent sale;
• dividend distribution, capital reduction, or liquidation.

In some cases, the local tax advantage of the in-kind contribution does not compensate for the additional complexity of the structure.

What Should Be Checked Before Making an In-Kind Contribution?

Before choosing an in-kind contribution, at least the following should be reviewed:

• who owns the property before the contribution and what their tax status is;
• how the property was acquired;
• whether there is a documented acquisition price;
• what the tax result would be in the case of a direct sale;
• what type of property is involved;
• whether there is a VAT risk;
• whether the person is registered for VAT;
• whether the receiving company will be required to register for VAT;
• whether the company will sell the property or hold it long term;
• how the person who made the contribution will receive the economic result of the sale;
• whether an applicable double tax treaty exists;
• what the administrative, accounting, and legal costs are;
• whether there is a genuine business reason for the structure.

If there is no clear answer to these questions, an in-kind contribution should not be made merely because no tax is assessed at the first stage.

When Can an In-Kind Contribution Make Sense?

An in-kind contribution may be a reasonable tool where there is a broader objective beyond a one-off sale.

For example:

• the property will be used in the company’s business;
• several properties need to be managed within one structure;
• an investment or development project is planned;
• several participants are involved and their relationship must be regulated through shares or company interests;
• long-term asset management is planned;
• family or succession planning is involved;
• the buyer prefers to acquire the company rather than a standalone property;
• the structure has genuine economic and management logic.

In such cases, the in-kind contribution may form part of meaningful planning. But it should then be built as a corporate and tax model, not as a one-off technique for avoiding tax.

When May an In-Kind Contribution Be Unjustified?

An in-kind contribution may be unjustified if the aim is simply for the property to be sold immediately and for the person who contributed it to receive the money personally.

In such a situation, the following must be carefully compared:

• the tax on a direct sale;
• the costs of the in-kind contribution;
• corporate taxation upon a sale by the company;
• dividend tax or tax on other subsequent income;
• VAT consequences;
• accounting and maintenance costs;
• timing;
• the risk of future disputes with the Bulgarian National Revenue Agency;
• the need for liquidation or capital reduction.

If, after this comparison, the structure leads to a similar or less favourable result, a direct sale may be the cleaner option.

Practical Risks and Mistakes

Frequently Asked Questions

1. What does an in-kind contribution of real estate mean?
   It is a non-cash contribution to a commercial company. The person contributes the property to the company and receives shares or company interests. After registration, the company becomes the owner of the property.
2. Is tax due at the time of the in-kind contribution?
   Under the Bulgarian Personal Income Taxes Act, no tax is assessed at the date of acquisition of the shares or company interests received in exchange for the non-cash contribution. This does not mean, however, that the structure is definitively tax-free.
3. Does an in-kind contribution save tax?
   This should not be assumed. In many cases, an in-kind contribution defers or transforms the tax effect. Tax may arise upon a sale of the property by the company, capital reduction, dividend distribution, liquidation, or sale of shares or company interests.
4. If the company sells the property, does the person who made the contribution receive the money immediately?
   No. The money belongs to the company. For it to reach the person who made the contribution, there must be a separate legal basis — for example, dividend distribution, capital reduction, liquidation proceeds, or sale of shares or company interests.
5. What is the acquisition price of the shares or company interests after an in-kind contribution?
   It should not be mechanically assumed to be equal to the valuation used for the contribution. In many cases, the documented acquisition price of the contributed property is decisive, and if evidence is missing, the tax result may be unfavourable.
6. Is there VAT on an in-kind contribution?
   This must be checked on a case-by-case basis. Particular attention is required if the contribution is made by a VAT-registered person, if the property is a new building, regulated land plot, right to build, or has been used in economic activity.
7. When does an in-kind contribution make sense?
   Usually where there is a broader investment or corporate objective — management of several properties, project development, participation of several persons, a long-term structure, or a genuine business function of the company. In the case of a one-off sale, it should be carefully compared with a direct sale.
8. Should a double tax treaty be reviewed?
   Yes, if the person who made the contribution is foreign for tax purposes. A treaty may be relevant for dividends, sale of shares or company interests, liquidation proceeds, or other payments, but its specific wording must be reviewed separately.

Conclusion

An in-kind contribution of real estate to a company can be a useful instrument, but it is not automatically a tax-free alternative to a sale. It may defer personal taxation for the individual at the time of the contribution, but new questions then arise: how the sale by the company will be taxed, how the funds will reach the person who made the contribution, what the acquisition price of the shares or company interests is, whether there is a VAT risk, and whether maintaining the company makes sense.

For this reason, an in-kind contribution should be viewed as part of an overall structure, not as a standalone tax technique. Before choosing this approach, the results of a direct sale, an in-kind contribution, a sale by the company, dividend distribution, capital reduction, sale of shares or company interests, and potential liquidation should be compared.

If you are planning an in-kind contribution of real estate to a company or comparing a direct sale with a corporate structure, contact us. Vassilev & Partners Law Firm can assist with tax and corporate analysis, preparation of the in-kind contribution procedure, review of VAT consequences, analysis of an applicable double tax treaty, and structuring the subsequent receipt of funds by the person who made the contribution.

Disclaimer

The information contained in this article is for general informational purposes only and provides basic guidance on the subject matter in light of the legal position as at the date of publication. Although we strive to ensure the accuracy of the content, legal rules and their interpretation may evolve over time. To verify the current wording of the applicable provisions and their application to your specific situation, you should contact us directly. We accept no liability for any damage that may result from independent use of the information contained in this article without prior individual legal consultation. This article does not constitute.