Business premises lease without rent payment

November 4, 20210


In business and accounting practice, we often encounter the situation that legal entities, especially entrepreneurs, use business premises located at the same address where the company is headquartered and do not pay rent. Natural person, the owner of the business premises hands over his premises to the legal entity and entrepreneur for free use, so that he can perform his activity there.

Frequently, there are no written lease agreements, but when there are, this type of agreement is called an unencumbered agreement. Of course, the natural person, as the Lessor, has the right to dispose of his property at will and in accordance with the law, in the sense that there is no obstacle to handing over the business premises to the legal entity and entrepreneur for free use.

This means that, from legal and accounting perspectives, there is no obstacle to the existence of this type of agreement but the tax perspective is questionable. When it comes to the lease of business premises that involves contracted rental fee, it is obvious that in this case, the lease tax is calculated and payed; from the accounting perspective, both rental fee and tax amounts are posted to the expenses ledger. If it is not necessary to pay rental fee, as is the case with the unencumbered agreement, it is also not necessary to calculate lease tax as a withholding tax in accordance with the Individual Income Tax Law.

The problem may and it usually arises during the tax audit process conducted by the Tax Administration, when the doubt that the premises are not handed over for free use can be expressed. The doubt that the Lessee does not pay rental fee i.e. that the contracting parties avoid to show the payout to avoid tax liabilities. According to the Law on Tax Procedure and Tax Administration, tax facts are determined in accordance to the economic substance; in this case, it can be simulated legal activity, which is used to cover some other legal activity. In other words, the Tax Administration can reasonably suspect that the contracted activity is not applied in practice. So, the Tax Administration, in accordance with the principle of facticity and the available information, can determine whether the activity displayed in the contracts is factually conducted or not. This means that the Tax Administration determines if this is indeed a lease without rent payment or the Lessee pays the rent in cash, without displaying that income and thus avoiding the obligation to pay tax.

Sometimes i.e. in some cases, it is economically logical and justifiable to hand over business premises for free use, as in the case of family members or a household member leasing business premises to an entrepreneur. In other cases, an economically logical question arises – why would a natural person, opposite to his economic interests, hand over his real estate to some other legal entity for free use.

What are the possible solutions in these cases? One of the solutions is to foreseen by the contract the specific amount of rent that will actually be the base for the lease tax calculation, although the rental fee itself will not be payed.

It should be pointed out that different cases appear in practice and that it is always good to ask for advice first; this is why we are here – to consider all aspects of each individual case.



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