The commercial lease contract is likely to generate numerous and complex questions about tax matters.
It is obviously not possible to be exhaustive on this subject. This article aims to address the main points on the subject.
No-door (or "right of entry")
The door pass or “entry fee” is a capital sum which remains definitively acquired by the lessor and which is paid, in one or more installments, by the tenant upon entering the premises. This ancient practice is considered lawful by the Court of Cassation.
This sum may be subject to two different tax regimes by the lessor depending on how it is worded (hence the importance of drafting this clause carefully):
- either this sum is treated as additional taxable income in the same way as the rent (although with the possibility of spreading the tax). Correlatively, this sum is deductible by the lessee.
- either this sum is treated as consideration for the depreciation of the property (the commercial lease offering the tenant a very protective status) or as the transfer of a professional asset by the lessor for the benefit of the lessee (for example in the event that the lessee takes over the premises in which the lessor previously carried out its activity, which can be assimilated to an indirect transfer of business to the lessee). In this scenario, this sum is not treated by the lessor as ordinary income but as professional capital gains, which allows you to benefit from a reduced rate if the asset transferred has been held for at least two years. .
When the lessor is a company subject to corporate tax, this distinction between rent supplement and professional capital gain is of no interest since in both case, the amount is treated as ordinary profit.
In the event of ambiguity in the wording of the clause, the judge will look for the common intention of the parties.
Attention: despite a less attractive tax treatment, the lessor often has an interest in the doorstep being treated as a rent supplement instead of a plus- professional value. Indeed, in the context of a commercial lease, rent reviews are capped, except in exceptional cases. This ceiling takes into account the initial rent, the lessor therefore has an interest in the doorstep being considered as a rent supplement.
Taxation of rent: land income or industrial and commercial profits
The rent is taxable as property income when the premises are rented bare by a natural person.
On the other hand, it is taxable as industrial and commercial profits when:
- it is rented with the furniture necessary for the lessee's operation
- the rental is granted by a legal entity carrying out an industrial and commercial activity which will have registered the premises in its assets
- the amount of rent depends on the amount of the lessee's income
Concretely, this difference will manifest itself in different reporting methods as well as a different tax regime. Thus, when rents are taxed for industrial and commercial profits, if the lessor is a natural person or a company subject to income tax, he will be subject to the micro-BIC regime if the rents for the year previous or that before are less than €72,600 (threshold applicable in 2021) which implies that a reduction of 50% may be applied (unless he opts for the real regime). Beyond this threshold, the lessor will be subject to the real regime and depreciation may in this case be deducted each year.
Rent and VAT
When the commercial premises are rented bare, the rent will in principle be exempt from VAT. The lessor can, however, opt for VAT if he wishes. Please note, in the event that the lessee is not subject to VAT, the commercial lease contract must expressly mention the lessor's option for VAT.
The interest of the option for the lessor is mainly to be able to deduct the VAT which will have been charged on his investments.
On the other hand, when the premises are furnished with the furniture necessary for operation, the rent will be subject to VAT.
Eviction compensation
The'eviction indemnityis the sum that the lessor pays to the tenant in the event of refusal to renew the lease.
We will first see under what conditions this compensation is deductible from the lessor's income before seeing the tax treatment for the lessee.
Deductibility of eviction compensation from the lessor
Depending on the case, the eviction compensation will either be deductible from the lessor's income, or treated as an element of the cost price of an asset, which implies that the lessor's income will be reduced. Eviction compensation will not be deductible from the lessor's income but may possibly be taken into account during the transfer of the asset for the calculation of the taxable capital gain.
For example, eviction compensation is analyzed as an element of the cost price of an asset when the owner wishes to take back the premises in order to sell them, demolish them, carry out the same professional activity as that of the outgoing tenant or assign them to residential use. It will then be taken into account for tax purposes when the asset is sold.
Conversely, eviction compensation paid by the owner is considered an immediately deductible expense when the owner's objective is:
- to rent the building under more advantageous conditions;
- or to settle there in order to carry out an income-generating activity different from that of the outgoing tenant (because if it is the same activity, the ;eviction compensation is seen as the "cost of acquisition" of the business of the outgoing tenant and therefore as the acquisition of an asset).
This is a very casuistical area and there is a lot of case law in this area.
Recourse to a lawyer with expertise in this area is therefore highly recommended.
Tax treatment for the lessee
Eviction compensation mainly aims to repair two types of damage: one relating to the loss of the right to lease, the other relating to reinstallation costs. The portion of the compensation intended to compensate for the loss of the right to lease is taxed as professional capital gains (as if the right to lease had been transferred). In practice, this capital gain, which will generally be equal to the amount of the eviction compensation less the doorstep, will be taxed at 30% (in 2021).
Regarding the portion of the compensation intended to compensate for relocation costs, the latter is considered as ordinary profit and taxed as such.
When the lessee is a company subject to corporate tax, this distinction between the two types of damage does not exist. Indeed, the eviction compensation will always be considered as ordinary profit, namely taxed with corporate tax (since capital gains made by companies subject to corporate tax are, with some exceptions, taxed as ordinary profits).
Maître Nicolas Rozenbaum is at your disposal regarding any request for assistance related to the drafting of your commercial lease contracts and for related disputes.