According to Article 10, paragraph 1 of the Local Taxes and Fees Act (LTFA), buildings and individual units in buildings located on the territory of the country, as well as land plots located within the construction borders of settlements and settlement formations, and land plots outside them which, according to a detailed spatial development plan, have the designation under Article 8, item 1 of the Spatial Development Act (SDA), and after a change of the land use when required under a special law, are subject to real estate tax.
According to Article 8, item 1 SDA, the specific designation of land plots is determined by the detailed spatial development plan and may be: in urbanized territories or in separate land plots outside them – for residential, public service, industrial, storage, resort, villa, sports and entertainment functions, for green areas and green links between them and areas for nature protection, for decorative water systems (cascades, canals and others), for transportation including bicycle lanes and facilities for people with disabilities, for technical infrastructure, for special sites and others.
To change the designation of a land plot – agricultural land – a special procedure must be followed, provided the legal requirements are met and the restrictions are observed according to the Agricultural Land Protection Act, the Ownership and Use of Agricultural Land Act and others.
There is inconsistent practice in different municipalities regarding the application of the LTFA to agricultural lands located within the construction borders. This inconsistency is also reflected in the courts. In the practice of the Supreme Administrative Court (SAC), two groups of resolutions can be observed. In the first group, the judges take the position that in order for a real estate property to be subject to taxation, it must fall within the construction borders of settlements and settlement formations or, located outside them, the property must have an approved detailed spatial development plan that defines its designation under Article 8, paragraph 1 of the SDA and the special procedure for changing the designation of agricultural land must be completed. This part of the case law holds the view that all prerequisites must be present in order for a tax obligation to arise, and the absence of any of them would exclude the property from taxation under Article 10, paragraph 1 of the LTFA and accordingly, no local tax would be due for it.
The opposite position is taken in the second group of resolutions, according to which the requirement for designation under Article 8, paragraph 1 of the SDA, established by a detailed spatial development plan, and for a change of designation under a special law, applies only to properties located outside the construction borders of settlements and settlement formations. For a real estate property located outside the construction borders of settlements and settlement formations to be subject to taxation, it must have an approved detailed spatial development plan and the procedure for changing its designation must be completed. In this interpretation, the key factor is the location of the property within the borders of urbanized territories, covered by the construction borders defined by a spatial plan, and it is pointed out that if a General Spatial Development Plan (a higher-level zoning plan which the detailed spatial plans must comply with) includes the property in question, it will be considered urbanized even if there is no detailed plan for it.
How is the type of territory determined?
The SDA regulates the principle for determining the territories in the country. According to their main designation, defined by the concepts and schemes for spatial development and the general spatial development plans, the territories in the country are:
- urbanized territories (settlements, settlement formations and industrial parks outside the borders of settlements and settlement formations);
- agricultural territories;
- forest territories;
- protected territories;
- disturbed territories for recovery;
- territories occupied by waters and water bodies;
- transport territories.
SDA is the general law governing the spatial planning and development of the territory. There are special laws in relation to the SDA concerning the change of the designated use of a given territory.
Initiation of an interpretative case
Due to the contradictory case law on this type of cases, a proposal has been submitted for the initiation of an interpretative case before SAC, which is to rule with an interpretative resolution on the disputed legal provisions. After the interpretative resolution is issued, it will be binding for all courts in the country, thereby harmonizing the application of the legal provisions and the case law.
The SAC has initiated an interpretative case and has formulated the following question for interpretation:
“Are land plots without buildings, located within the construction borders of settlements and settlement formations, which do not have a specific designation determined by a Detailed Spatial Development Plan under Article 8, item 1 of the SDA, as well as a change of land designation when this is required under a special law, subject to real estate taxation under Article 10, paragraph 1 of the LTFA?”
It is interesting why the interpretation is limited only to land plots without buildings, given that the legal framework allows construction on agricultural land without changing the designation. Without changing the designation of agricultural land, construction is permitted on it for facilities related to its use, whose functions are compatible with the land’s designation, as follows:
- for plots up to 10 decares – one-story agricultural buildings for storage of agricultural products and equipment, including living quarters within them;
- for plots over 10 decares – agricultural buildings, structures and facilities for storage of plant and animal products and for raising animals.
If the land designated for construction is smaller than 10 decares, it is not necessary to prepare a DSP. For larger plots, it is obligatory to prepare a DSP – to determine the construction parameters, not to change the designation. Perhaps based on the secondary legislation, it would be appropriate to amend the question of the interpretative case to cover all disputed hypotheses and avoid indicating that some legal subjects are more burdened than others.
Opinions are expected from the Prosecutor General, the Minister of Justice, the Supreme Bar Council and the participants invited by the SAC: the National Association of Municipalities, university deans, the Bulgarian Academy of Sciences.
Significance of the interpretative case for administrative and judicial proceedings
According to Article 114, paragraph 1, item 4 of the Tax and Social Security Procedure Code (TSSPC), the audit procedure may be suspended when another judicial proceeding has been initiated that is of significance for its outcome. In this sense, the pending Interpretative Case No. 5/2024 of the SAC, which will provide binding interpretation on the issue of taxation of undeveloped agricultural land within the construction borders of settlements, may serve as grounds for suspension of the audit. If the audit considers precisely this disputed legal issue, the audited person has the right to request suspension of the procedure until the court’s resolution is issued, thus ensuring that the audit act will comply with the unified case law and will not later be annulled as unlawful.
Pending judicial proceedings in which a question identical or similar to the subject of Interpretative Case No. 5/2024 of the SAC is raised may be suspended until the interpretative resolution is issued. Significance for the application of the LTFA after the interpretative resolution: under the law, when a resolution in an interpretative case is expected and it is of importance for the proper resolution of the specific dispute, the court may suspend the proceedings either ex officio or at the request of a party.
Significance of the interpretative resolution
The issuance of an interpretative resolution by the SAC on whether undeveloped agricultural land within settlement borders is subject to local taxation under Article 10, paragraph 1 of the LTFA will have a direct impact on the administrative practice of municipalities. The resolution will provide binding guidance on the conditions under which a land plot is considered a “taxable object”, thereby ensuring consistent application of the law throughout the country. This will provide legal certainty both for municipal administrations in determining and collecting local taxes, and for taxpayers, who often face different treatment depending on the location of the property.
Regarding pending court proceedings, the interpretative resolution will be of particular importance. Pursuant to Article 130, paragraph 2 of the Judicial System Act, the interpretative resolutions of the SAC are binding on judicial authorities and will be observed by the courts when issuing rulings in unresolved cases with similar subject matter. This means that courts dealing with disputes over the liability to pay tax on undeveloped properties in urbanized areas will have to align their resolutions with the adopted interpretation. This will ensure consistent case law in the application of the LTFA.
The article above is for information purposes only. It is not a (binding) legal advice. For a thorough understanding of the subjects covered and prior acting on any issue discussed we kindly recommend Readers consult Ilieva, Voutcheva & Co. Law Firm attorneys at law.
