Lease Agreement

October 28, 2021by Stefan0
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LEASE AGREEMENT – LEGAL, ECONOMIC AND TAX ASPECTS

Business environment in modern economic flows imposes a fast pace of work and business, which increasingly calls into question the profitability and cost‐effectiveness of investing in their own business premises, own fleet and immovable and movable property of economic entities in general.  In this respect, leases can be considered to be a good solution in certain and unique business situations, especially at the beginning of conducting a business when liquidity bears a predefined and arranged in time burden, and therefore leaves more room for work on the creation of current assets.

A lease is a contractual arrangement between two parties, the Lessor and the Lessee, in which one party, the Lessor, undertakes to hand over a certain property (movable or immovable) to the other party, the Lessee, and the other party, the Lessee, undertakes to pay the appropriate rent for that use. This relationship is defined by the Lease Agreement.

A lease is an agreement because it is regulated by law (Apartment lease, Equipment lease, Vehicle lease, etc.), it is usually formal and must have a written form. It does not have to be notarized to be valid. The Law of Contract and Torts (serb. ZOO) regulates the basic provisions of this law. When it comes to apartment, special provisions of this agreement are regulated by the Law on Housing (which is a Lex specialis in relation to the ZOO), as well as the Law on Agricultural Land which is also a Lex specialis in relation to the ZOO when it comes to agricultural land.

A lease agreement defines the subject of the lease, the rental fee, the duration of the lease, the obligations of the Lessor, the obligations of the Lessee, the termination of the Agreement. To the extent of determination of the basic elements of the agreement as precisely as possible, as well as of all other important elements that go beyond the basic ones, the possibility of economic coverage will be greater. Therefore, for the Lessee, as a legal entity, all basic and additional costs are defined so that they can be recognized as costs not only in financial but also in tax terms.

In business practice, the lease agreements for business premises are the most common. In addition to the need to have these basic elements as precisely defined as possible from the legal aspect in such an agreement, from the tax aspect it is important to determine whether:

  1. the Lessor is a legal entity
  2. a) which is not in the VAT system
  3. b) which is in the VAT system
  4. The Lessor is a natural person
  5. a) which is not in the VAT system
  6. b) which is in the VAT system
  7. the Lessee is a legal entity
  8. a) which is not in the VAT system
  9. b) which is in the VAT system
  10. The Lessee is a natural person
  11. a) which is not in the VAT system
  12. b) which is in the VAT system

 

In business practice, there are most often cases when the Lessee is a legal entity (in the VAT system or not) and the Lessor is a natural person. Business entities most often do not own their own business premises, but rent them from natural persons and enter into a Lease, thus they can have the registered office of the company at the address of the leased business premises.

One of the elements of the agreement is certainly the rental fee clause. For a legal entity, it represents an expense that is entered in the business records and recognized in the tax balance when calculating taxable profit. For a natural person, the amount of rent is income that is taxed in accordance with the Individual Income Tax Law. Namely, Article 6 of the Law defines the income from renting out one’s own real estate as capital income. The tax rate is 20% with the recognition of standard costs in the amount of 25%, which means that the contracted rental fee is considered to be the net amount to be gross amount. The obtained gross rent is reduced by 25% of standard costs and this forms the basis on which the rate of 20% is applied.

The question is who calculates and pays the amount of tax based on the lease? Although the taxpayer is a natural person (because he has capital income), the calculation, registration and payment on behalf of a natural person is performed by a legal entity or an entrepreneur when paying the rent. Why is it so? The reason is that in the Republic of Serbia, the Individual Income Tax is characterized by direct taxes and is calculated and paid after deduction, ie. it is calculated and paid by the person who is the income payer to natural persons.

The actual costs that incurred during income acquisition can be accepted instead of the standard costs of 25% to the taxpayer of capital income (natural person who owns real estate), at the request of taxpayer with submitted evidence.

Real estate sublease is not taxed in the same way as the lease itself, because sublease is an income that differs from the capital income.

By the end of January each year, the legal entity or entrepreneur issues a certificate to the natural person on paid taxes and deductible contributions for the previous calendar year on the PPP-PO form, which is proof to the natural person of the reduction in calculating the annual individual income tax.

The lease topic is complex in many ways, therefore feel free to contact us regarding any legal, economic-legal and tax-legal issues.

 

 

 

 

 

Stefan


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