What does the exemption from rent in exchange for renovation look like in the light of the law?

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Renting real estate is a very common and popular practice among entrepreneurs. A given entity may be interested in a specific location and will gladly make a decision to lease the property. The technical condition of the subject of the lease may vary, therefore entrepreneurs give up the classic payment of rent in favor of a structure in which the tenant is exempt from rent in exchange for the work carried out for the renovation of the premises. It is worth considering the tax consequences of such a contract.

Rent in exchange for renovation in the light of the regulations

The lease agreement is regulated by the Civil Code. According to the definition contained in the lease agreement, the landlord undertakes to give the tenant the property for use for a specified or indefinite period of time, and the tenant undertakes to pay the landlord the agreed rent. It must be in a paid form, but it can be marked in money or take the form of a benefit in kind. The construction of the rent in a non-monetary form is possible because the provisions of the Civil Code stipulate that if the debtor, with the consent of the creditor, fulfills another benefit, the obligation expires.

Moreover, the provisions of the Civil Code stipulate that if the debtor, in order to release himself from the obligation, performs another service with the consent of the creditor, the obligation expires.

This is a legal institution known as performance service. The purpose of this is to terminate the existing obligation between the parties (in this case, rent payments) through the tenant's performance of a service other than that specified in the original contract. The obligation then expires as if it had expired by ordinary performance (e.g. by payment of the rent), and the necessary condition for the termination of the obligation is the actual performance of the debtor.

Therefore, it is permissible for the tenant to cover the renovation costs in exchange for the rent exemption.

Mutual performance

In the light of income tax, it should be considered that the performance of renovation works in return for the exemption from rent constitutes a benefit for consideration which will be set off against the due rent. This situation should therefore be regarded as consideration under the barter contract. As a result, the lease agreement will remain for pecuniary interest, which means that the lessor should prove income from the provision of the service.

As indicated by the Director of the Tax Chamber in Poznań in the individual ruling of April 1, 2010, ref. No. ILPB1 / 415-55 / 10-4 / AA:

(...) renting a real estate in exchange for its renovation will constitute a property gain for the Applicant, constituting income subject to income tax. As a result of renting the property, the Applicant will receive a rent in the amount of the expenses incurred by the tenant on the property.

Thus, the value of the renovation performed will constitute the rent for the lease at the disposal of the landlord. Therefore, if the tenant of the real estate, in exchange for the rent, transferred to the landlord the value of the outlays he had incurred for this real estate, the rent will be paid with the renovation costs borne by the tenant. The value of these outlays is the rental income for the landlord.

The value of the renovation performed will be the rent for the lease at the disposal of the landlord. Therefore, if the tenant of the real estate, in exchange for the rent, transferred to the landlord the value of the outlays he had incurred for this real estate, the rent will be paid with the renovation costs borne by the tenant. The value of these outlays is the rental income for the landlord.

Example 1.

Entrepreneurs have concluded a premises lease agreement. Due to the poor technical condition of the property, the parties agreed that the landlord would release the tenant from the rent in exchange for the renovation. The renovation cost was PLN 7,000. The landlord should recognize tax income in this amount.

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Exemption from rent in exchange for renovation in the light of VAT

In terms of value added tax, it should first be noted that we are dealing with the transfer of outlays made by the tenant in return for providing the premises. It should also be emphasized that the outlays on real estate do not constitute goods within the meaning of the VAT Act. Outlays are not a thing, but only result in the tenant's claim for reimbursement of costs incurred. Consequently, it should be considered that the outlay is a property right that can be traded.

Bearing the above in mind, the paid activity of selling the inputs constitutes the paid provision of services within the meaning of the VAT Act. If the tenant is released from the rent due to his expenses on the rented premises, this activity should be documented with invoices. The landlord should issue invoices to the tenant for the full amount of the rent, the tenant should issue invoices or re-invoices to the landlord for the reimbursement of some of the expenses incurred. The above is due to the fact that the settlement of the inputs is in fact the sale of rights to those inputs, and therefore the provision of services subject to VAT. Such a position results, inter alia, from from the individual interpretation of the Director of the Tax Chamber in Warsaw of January 28, 2009, IPPP3 / 443-204 / 08-2 / RK or the individual interpretation of the Director of the Tax Chamber in Bydgoszcz of October 11, 2010, ITPP1 / 443-719 / 10 / AT .