Not only individuals can rent and lease housing in Russia, but also companies that rent an apartment, for example, for their employees, or, on the contrary, act as a landlord themselves. 

In the RIA Real Estate article, TC tax consultant Ekaterina Kopylova reviewed various situations related to renting and leasing of real estate by legal entities and answered frequently asked questions.

What tax risks arise in a situation when an individual rents an apartment from a legal entity-owner?

Risks in terms of value added tax are minimal, because services on provision of residential premises to an individual for use, rendered within the framework of a contract of rent (lease) of residential premises by an organization, which owns or leases such residential premises, are exempt from VAT [1].

As regards profits tax on organizations, the following should be taken into account. 

Since the leasing out of apartments by a company is primarily connected with income-generating operations for the taxpayer, in this case there are no significant tax risks for the legal entity.

It is worth mentioning that income should be reflected, and taxes in respect of them should be calculated and paid from actually received income in full and in a timely manner. Thus, real rental income is in the focus of attention of auditors, and its amount can be established by the tax authority reliably in the course of control measures with the use of various evidence, which is confirmed by current court practice [2]. The company's income is not only the rent payment, but also compensation for the cost of utilities paid by the tenant [3].

What are the nuances in the situation when a legal entity rents an apartment from an owner-physical person?

Expenses incurred by a company in renting an apartment from an individual may be taken into account for profits taxation purposes. At the same time, such expenses, like all other expenses, must meet the criteria of economic feasibility and documentary support set out in Article 252 of the Tax Code of the Russian Federation. Therefore, it is extremely important not only to qualitatively formalize contractual relations and primary documents, but also to actually use the premises in the taxpayer's activities aimed at generating income.

Thus, we see possible tax risks (refusal to recognize expenses for taxation purposes) if the tax authorities find that:

• The apartment (s) is not actually used by the company. For example, the premises are idle for a long time and the company has no intention to use them;
• The premise (apartment) is not fit for use and the company does not take actions to bring it into proper condition;
• The apartment (s) is actually used by third parties in their own interests (e.g., the premises are occupied by employees of other organizations, used for storage of third parties' valuables, etc.), without any contractual relations with the company.

From the analysis of practice we can also conclude that the courts in making decisions analyze the very fact of using the leased property in the taxpayer's activities [4].

At the same time, there are some peculiarities, and therefore additional risks for the lessee company associated with the accounting of expenses for the lease of apartments (residential premises). 

1) It should be noted the risks arising in case the apartment is not used for its intended purpose, for example, as a company office. Accounting of expenses for such rent, repairs of the premises and other for taxation purposes will probably be recognized as unauthorized [5].

2) Risks may arise when it is necessary to incur expenses for the repair of the premises. In order to manage them, it is important to reflect in the contract on whom the corresponding obligation is assigned. As a general rule, major repairs will be the responsibility of the landlord, and current repairs will be the responsibility of the tenant [6]. In this case, the fulfillment of the landlord's obligations for capital repairs cannot be regarded as an economically justified expense and accounted for profit tax purposes [7].

3) Expenses in the form of rent for the time when the premises were not used can potentially be challenged. The Ministry of Finance of Russia points to this in some of its explanations, but, however, only in relation to apartments used to accommodate business travelers [8]. However, in our opinion, this risk can be assessed as low, because if it is realized in practice, it can be overcome [9].

Who will be the tax agent in these situations?

As a general rule, a company becomes a tax agent when paying rent to an individual [10].

In this case, the income of an individual should include not only the rent itself, but also compensation for utilities, the cost of which does not depend on their actual consumption [11].

The lessee is obliged to calculate, withhold and transfer to the budget personal income tax from the remuneration paid under a lease agreement with an individual, as well as to report on this in the form of 6-NDFL. We remind you that personal income tax is calculated in accordance with the progressive taxation scale at the rates of 13-22%. The lessee is not entitled to pay personal income tax at its own expense or to shift these obligations to an individual. Consequently, payments to the lessor must be made minus the withheld tax. 

If the lessor has the status of a sole proprietor, payer of NPD (self-employed), he must declare his income, calculate and pay the relevant taxes independently.

Thus, risks arise if the company has not fulfilled its obligations as a tax agent for personal income tax in respect of rent. For failure to withhold and (or) transfer (incomplete withholding and (or) transfer), the law provides for a penalty of 20% of the amount to be withheld and (or) transferred [12]. Penalties are also established for the failure (submission with errors) by a tax agent of reporting on withheld tax [13].

Is it necessary to state in a lease agreement that a lessee company transfers payments to an individual lessor minus withholding tax?

In a lease agreement, the contract price is stated in the full amount without deduction of personal income tax.

For example, if the rent for a month is 100,000 roubles, it may be specified in the section «Procedure and terms of settlement» of the lease agreement that the payment is made minus personal income tax withheld by the tax agent from the amount of the rent.

Thus, it is not necessary to specify the calculation in the agreement and mention that the rent is transferred net of personal income tax, as it will not affect the tax consequences, but the harmonization of such wording will help to form an understanding of the parties to the transaction regarding mutual obligations and avoid possible disputes between the tenant and the landlord.

[1] Subp. 10 p. 2 of Art. 149 of the Tax Code of the Russian Federation, Letter of the Ministry of Finance of Russia from 01.08.2016 № 03-07-11/44922.

[2] For example, Supreme Court Determination No. 309-ES23-30097 of 07.06.2024 in case No. A76-5542/2022.

[3] Art. 41 of the Tax Code of the Russian Federation, Letters of the Ministry of Finance dated 13.05.2022 № 03-11-06/2/44281, dated 20.05.2016 № 03-11-12/28930.

[4] For example, rulings of the AC PO of 08.10.2015 № F06-815/2015 in case № A12-41908/2014; AC DO of 10.06.2015 № F03-1848/2015 in case № A51-23957/2014; FAS CO of 20.02.2014 in case № A48-4858/2012.

[5] Letter of the Ministry of Finance of the Russian Federation from 14.02.2008 № 03-03-06/1/93, Letter of the Ministry of Finance of the Russian Federation from 10.11.2006 № 03-05-01-04/310.

[6] Art. 616 of the Civil Code of the RF.

[7] Letters of the Ministry of Finance of Russia dated 01.02.2011 No. 03-03-06/1/51, dated 27.07.2006 No. 03-03-04/2/183.

[8] Letters of the Ministry of Finance from 15.01.2016 № 03-03-07/803, from 25.03.2010 № 03-03-06/1/1/178, from 25.01.2006 № 03-03-04/1/58.

[9] For example, Ruling of the Arbitration Court of the Volga District from 03.10.2014 № F06-14949/2013.

[10] Paragraphs 1 and 2 of Article 226 of the Tax Code of the Russian Federation.

[11] Letters of the Ministry of Finance of Russia from 23.03.2018 № 03-04-05/18556, from 12.11.2013 № 03-04-06/48313.

[12] Art. 123 of the Tax Code of the Russian Federation.

[13] Art. 126 and Art. 126.1 of the Tax Code of the Russian Federation.