Frequently Asked Questions by Entrepreneurs Who Rent Out Properties They Own: When Does Renting an Real Estate (Apartment/House) to Another Company Lose the Right to VAT Exemption?
One of the frequent questions encountered by entrepreneurs who own real estate (a house or an apartment) is how to correctly invoice rent when the property is leased to another company.
It is a common misconception that any rental of residential property is automatically exempt from VAT. However, according to the current regulations, the key factor is the entity with whom you sign the contract, not the actual purpose of the space.
Rental to Legal Entities is Taxable
Although Article 40, Paragraph 1, Item i) of the VAT Act stipulates that the rental of residential properties for the purpose of permanent living is exempt from VAT, this rule cannot be applied in this case.
The crucial detail lies in Article 73, Paragraph 3 of the VAT Regulations, which further clarifies this legal exemption:
“Renting furnished or unfurnished rooms and residential premises, for occasional stay, without the intention of permanent living, for tourist purposes (to occasional guests) and business purposes (to representatives of companies, etc.) is not exempt from paying VAT. The rental of furnished or unfurnished rooms and residential premises to a legal entity is not considered a rental for the purpose of housing and is not exempt from VAT.”
Therefore, according to the aforementioned provisions, the rental of residential premises to a legal entity is subject to VAT. Since the contract is concluded between two companies, this relationship is considered a commercial transaction, rather than a rental to citizens for residential purposes.
Regardless of whether the other company will use the property (apartment/house) for the housing of board members or for the needs of its employees, your company (as the property owner) is obliged to issue an invoice with VAT calculated at the general rate of 25%.
Why is This Actually Good News for You?
Although the invoice amount with VAT will be higher, this business model directly protects your company from financial penalties related to the adjustment of input VAT.
Namely, according to Article 62 of the VAT Act, if you start using a property for which you deducted input VAT during its acquisition or construction for activities that are exempt from VAT (such as direct rental to citizens), a legal obligation for an input VAT adjustment arises. This adjustment is carried out over a capital period of 10 years (a repayment of 1/10 of the deducted tax annually).
Considering that you issue an invoice with 25% VAT to the other company, you are performing a fully taxable supply. This means that you have no obligation to return or adjust the previously deducted input VAT for that house.
What does this mean for a company that rents a residential property?
For the company renting the property, the situation is less favorable. According to the Value Added Tax Act, Article 58, paragraph 1 of the Value Added Tax Act., the right to deduct input VAT exists only for goods and services that have been acquired for the purposes of taxable transactions of the taxpayer.
Since the accommodation of employees is considered their personal consumption (benefit), the company renting will not be able to deduct input VAT from your account as input VAT. For them, this VAT becomes a direct cost of doing business, i.e. it increases the total gross cost of renting the property.
Note: Official interpretations and current amendments to legal provisions can be followed on the official website of the Tax Administration.
Author: Admin