Works to pay the rent: are you doing it right?

Quite often the tenant agrees with the landlord that the first months of rent are not paid, in exchange for carrying out works on the rented property. It can happen with homes, but it happens much more often with commercial premises or offices. A lessor or assets (in this case real estate) is a taxpayer for VAT purposes (the VAT Law says so). And the commercial leases are subject and not exempt, at the rate of 21% (also according to the VAT Law). So we are going to analyze how this “swap” (rent in exchange for works) affects personal income tax and VAT, based on a very recent binding tax ruling (Consultation V0604-21), of March 16, 2021.

What happens at personal income tax level?

This relates to the situation where the landlord is a moral person. This consideration (rent for works) is considered income in kind for the landlord, who must consider it as income from real estate when filing his returns.

Regarding their temporary imputation (that is, in which fiscal year they must be declared), we must refer to article 14.1.a) LIRPF: “The income from work and capital will be attributed to the tax period in which they are due by the recipient”. Consequently, in this case the returns on real estate capital must be allocated at the end of the contract, that is, in the tax period in which they are delivered to the owner.

In the case raised, the object of the inquiry was the leasing of a commercial premises, however, there are no reasons to understand that the solution would not also apply in cases of housing or industrial leasing.

What about VAT?

For VAT purposes, the lease of commercial premises is an activity subject to and not exempt from tax and for which the lessor is considered an entrepreneur or professional.

In this case, the tax office understands that the months in which the lessee is obliged to pay the costs of the works and in which the lessor does not collect monetary rent are a “grace period”.

Likewise, it also understands that we are dealing with a “swap” contract in which, by definition, the consideration is paid in kind. From an economic and commercial point of view, swap contracts are identical to transactions in which the consideration is monetary.

Consequently, the lessor must pass on to the tenant the VAT corresponding to the grace period even if the tenant does not satisfy the agreed rent. What should be the tax base? We must go to article 79 of the VAT Act. For the case in question, the tax base would be constituted by the value that the lessor attributes to the services that he intends to obtain, and the lessee has agreed to perform. For this reason, the taxable base of VAT corresponds to the amount of the investment in renovation works that they have agreed to carry out on the premises. And be careful, this is an important point, since it can be higher or lower than the amount of the rent that is “swapped”.

Regarding when the VAT is due to pay, art. 75 LIVA establishes that in the provision of services, the tax will accrue “when the taxable operations are rendered, executed or carried out” and, in turn, the income will accrue at the time the part of the price included in each perception is payable.

In this case, the payment of this part of the lease will occur at the end of the contract, when the works made are handed over to the landlord, together with the keys.

Article 75.7 of VAT Acta establishes that, when the payment of the tax has not been agreed, or it has been established with a periodicity larger than one calendar year, the accrual of the tax occurs on December 31 of each year for the corresponding proportional part: have you ever seen anyone doing this calculation, this way, in such cases?

Only one thing is certain: almost no one is doing it well …

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