According to the latest amendments to the Individual Income Tax Law, which came into force on May 30, 2013, revenue from leasing personally owned estate is classified as capital income. The articles previously regulating these revenues (Articles 66-71 of the Law) were removed.

This post discusses the lease of real estate owned by a natural person to a legal business entity or entrepreneur.

The legal business entity (the lessee) is obligated to calculate and pay capital gains tax (leasing personally owned real estate) when leased real estate is the property of a natural person.

Even when the recipient of the income is a natural person, legal business entity, or an entrepreneur, the leaseholder is obliged to calculate and pay income tax when paying rent. Therefore, the withholding tax needs to be paid on the same day that rent is paid.

It’s important to note that any works done on the premises are treated as part of the lease as long as they remain in the ownership of the lessor. For instance, if a legal business entity replaces the flooring or renovates the plumbing in the leased premises the value of the work will be considered part of the lease, as this added value remains in the ownership of the lessor. On the other hand, if the lessee makes investments to modify the premises to suit their needs for the duration of the lease and subsequently removes the modifications when vacating the premises, these will not be considered part of the lease.

This information is relevant considering that the value of the lease is the basis on which income tax is calculated. Namely, the taxable income on real estate is composed of the gross lease value deducted by 25% of recognized expenses. The tax rate on this income is 20%.

Given that a lease is generally contracted for a net amount, it’s necessary to recalculate the gross amount using a coefficient of 1.176470588. 25% of the recognized expenses are then deducted from this gross amount. Multiplying that amount by the 20% tax rate will produce the total capital gains tax on the leased property.

If the relevant tax authorities suspect an unrealistically low lease price was presented in order to reduce tax liabilities, they may determine a new amount in accordance with market trends.

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