When renting is a business activity – a favorable resolution for landlords

At a time of rising inflation and falling money values, it is becoming increasingly popular to invest savings in rental housing. Many times landlords own several properties, earning high income from rent. When is it just profiting from property (taxed with 8 or 12% flat rate), and when does it meet the definition of business activity, taxed according to less favorable general rules? The answer to this question is provided in the Resolution of 7 judges of the Supreme Administrative Court of 24 May 2021 (Ref. No.: II FPS 1/21), which states that:

1. Revenue from the lease is treated as revenue from economic activity only when the subject of the lease is introduced into property related to the performance of an economic activity. This, in turn, is decided each time by the taxpayer himself.
2. By its nature, civilian benefit such as lease rent is related primarily to the possession of the specific property and not to activity within the scope of business activity. According to NSA, it would be incorrect to assume that such passive obtaining of benefits constitutes conducting business activity, even if – just like business activity – it requires a certain degree of organization.
3. If the taxpayer does not undertake actions aimed at clear separation of the enterprise (does not build an organizational structure, does not work out an activity strategy), it cannot be deemed that the assets are connected with business activity. Investing surplus funds to purchase real estate and then renting it out cannot be regarded as such activity.
4. It cannot be concluded from the amount of revenue or the number of leased properties that this is an economic activity. The resolution points out that there are two flat rental rates (8 and 12%), depending on the amount of revenue generated. This means that the legislature itself provided for high rental income to be earned outside the scope of the business activity.

To sum up, the resolution indicates that it is the taxpayer who decides whether the lease constitutes business activity.

The resolution was issued in response to a question posed by the Small Business Ombudsman. The position presented in the resolution, which reflects the long-established line of judicial practice, should prevent tax authorities from automatically classifying larger-scale leases as business activity.