Rent payments in pandemic times II – tax implications

Lessees whose inability to pay rent has been caused by the pandemic should be protected from the unilateral termination of a lease by the lessor on the grounds of the lessee’s failure to pay rent. As regards premises leased for business purposes (commercial premises), the bill applies to the period between 12 March and 30 June 2020. The ‘protection period’ within which the rent must be paid ends on 31 December 2020, which is a significant change from the date originally proposed by the government, i.e. 31 March 2022.

From a tax perspective, lessors still must meet their obligations, mainly as regards income tax and VAT. Lessors who use double entry book-keeping have to pay tax on their income within the generally applicable deadlines, depending on the calendar year or financial year they use as a taxable period, regardless of whether the rent has actually been paid. For those using the calendar year, there should be no negative impact on cash flow arising from the lessor’s income tax, as the protected period has been shortened; perhaps except for cases where lessees end up terminating their business activity. However, for lessors using a financial year, there may be some negative effects on cash flow due to their income tax payment obligations.

Similarly, lessors who are VAT payers must declare rent in their VAT returns, in accordance with generally applicable rules for determining the date of taxable supplies – i.e. usually on a monthly basis, unless otherwise agreed. This means that lessors still must pay VAT on the rent within the statutory deadlines. On the other hand, they are also entitled to deduct VAT on the invoices, again in accordance with generally applicable laws and rules, i.e., regardless of whether rent was paid.

These negative impacts may be eliminated by applying for the deferment of tax payments, along with a waiver of interest on the deferred amount. This, however, creates a certain administrative burden for lessors, and there is still the risk that the application may not be granted. If the rent is not paid due to the termination of the lessee’s business activity, the procedure for the correction to the tax (VAT) base for unrecoverable debt should be followed.

Similar issues are also faced by owners of rental apartments; we will cover this topic in the next issue of the Tax and Legal Update.

If you have any questions or need to address the tax implications of a concrete situation, please do not hesitate to contact us.