Renovation of the rented premises and income from free benefits

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Entrepreneurs use premises that do not belong to them during their activity. They are used, inter alia, on the basis of a loan agreement. In the case of lending the real estate, the problematic issue is the emergence of income from free benefits, in the event that the user performs the renovation of the rented premises.

What is the lending agreement?

The loan agreement belongs to the category of named agreements. It is regulated by the provisions of Art. 710-719 of the Civil Code. Lending is an agreement by which the lender undertakes to allow the taker for a fixed or indefinite period of free use of the item given to him for this purpose.

The subject of this contract can therefore be both movable and immovable property. It is important that the lending agreement actually meets the requirement of being free of charge. The person taking the item into use is obliged to bear the usual costs of maintaining the item. If, on the other hand, the person taking the thing to use exceeds this limit, this activity will be treated as conducting someone else's affairs without commission.

The lending agreement can be concluded in any form (oral, written or even implied). There is also no time limit as to its duration. It belongs to the category of real contracts. Therefore, its conclusion depends on the actual delivery of the item.

The item put into use should be fit for use. If he has defects, the lender is obliged to repair the damage he caused to the user by not notifying him of the faults. This rule does not apply when the party taking the defect could be easily noticed.

After use, the recipient is obliged to return it to the owner in a non-deteriorated condition. However, if the wear resulted from proper use, it is not responsible.

The taker is responsible for accidental loss or damage to items if:

  • uses it in a manner inconsistent with the contract, properties or intended use,

  • entrusts the goods to a third party without contractual authorization or being forced by circumstances.

An additional condition of liability is that the item would not be lost or damaged if these circumstances did not exist.

The lender may define the way of using things in the contract. If he does not, the taker may use it in a manner appropriate to its properties and purpose.

Free benefits and renovation of the rented premises

Revenues are in particular money received, monetary values, including exchange rate differences.

Revenue also includes the value of things or rights received free of charge or partially against payment, as well as the value of other free or partially paid benefits.

Therefore, free service should be understood as all those legal and economic events which result in free of charge, i.e. not related to costs or any other form of equivalent, contributing to the property of these persons, having a specific financial dimension.

In the judgment of 12 December 2008 (file reference number II FSK 1361/07), the Supreme Administrative Court stated that the free benefit covers all economic phenomena and legal events resulting in gaining benefits at the expense of another entity, or all these legal and economic events in the activities of legal persons, the effect of which is gratuitous, i.e. not related to costs or any other form of equivalent, contributing to this person's property with a specific financial or financial dimension.

In our opinion, in a situation where the renovation of the rented premises was carried out voluntarily, taking into use and is adaptive to its activity, no income will be generated for the lender from free benefits. Such a position was confirmed by the Director of the National Tax Information, in the individual ruling of August 9, 2017, file ref. 0111-KDIB2-3.4011.70.2017.1.KK, in which we can read:

"(...) that carrying out a renovation by the user in a rented residential building does not generate income for the Applicant. It is not possible to speak of a gain in a situation where the user of the rented building carried out a renovation without the consent of the Applicant. It is difficult to assume that if it were not for the renovation carried out by the user, the Applicant would have decided to carry it out herself and would incur expenses on this account, since, as she herself indicates, the renovation rooms did not require (...) ”.

No income

However, there will be no revenue for the recipient if the person providing free of charge is a person classified to tax group I or II within the meaning of the provisions on inheritance and donation tax. Therefore, if the lender is to the taker:

  • a spouse, descendant (child, grandson, great-grandson, etc.), ascendant (parent, grandfather or grandmother, great-grandfather or great-grandmother, etc.), stepson, son-in-law, daughter-in-law, sibling, stepfather, stepmother, one of the parents-in-law (tax group I) or

  • descendants of siblings, one of the parents 'siblings, descendants or the spouse of stepchildren, the spouse of one of the siblings or one of the siblings of that spouse, the spouse of the spouses' siblings, the spouse of other descendants (tax group II)

- then the user does not determine the income for tax purposes.

It should be noted that the above exemption also applies to entrepreneurs, which is confirmed by the tax authorities. Such a position was presented by the Director of the Tax Chamber in Warsaw in a letter of August 14, 2007, No.IPPB1 / 415-1 / 07-2 / ES, where we read:

"(...) The legislator makes the reporting of income from free lending under a contract for the lending of items used for the needs of business activity dependent on the degree of kinship between the persons concluding this type of contract. Taking into account the above regulations and bearing in mind the presented future state, it should be stated that the revenues from free benefits resulting from the loan agreement concluded between you and your parents, i.e. persons whose kinship is included in tax group I, are exempt from taxation ( ...) ".

Inventory costs of the rented premises

On the other hand, for those taking advantage of the renovation of the rented premises and its costs will be considered as investments in foreign fixed assets. Such an investment is not directly recognized as costs, and should be accounted for as an investment in a third-party asset and depreciated.

Such a position was confirmed by the Director of the Tax Chamber in Gdańsk, in the interpretation of November 14, 2007, ref. No. BI / 4117-0007 / 07 / IS, in which we can read:

"(...) In the present state of affairs, we are dealing, therefore, with the implementation of adaptation works prior to the commencement of economic activity by the Taxpayer, consisting in adapting an asset (premises) to be used for a purpose other than the one for which it was originally intended (for living) and not used (consumed) by the Taxpayer. The taxpayer, by carrying out works adapting the premises to the needs of economic activity, changed its function from "residential" to "commercial" premises, in which the business will be conducted, and thus changed its purpose. Moreover, the premises constituting a "foreign fixed asset" were not used by the Taxpayer before incurring the outlays.

Taking into account the factual and legal status, the expenses incurred by the Taxpayer for the rented premises (exceeding PLN 3,500 in the tax year) do not constitute a tax deductible cost. The cost of obtaining income in the case of investments in foreign fixed assets are depreciation made in accordance with the principles referred to in article 1. 22a to 22n of the Personal Income Tax Act (Article 22 (8) of the Act of September 26, 1991) (...) ”.