Leasing Property to Your Own Company

I. Are you a related party? Beware of the tax risk!

When are you considered related parties? Typically, if:

• You hold a direct or indirect share of at least 25% in the share capital or voting rights.

• One person participates in the management or control of another.

• You are close persons (relatives, spouses, partners).

If you fall into the category of related parties, a whole range of specific rules and obligations are triggered for you. This is not just a formality, but the key to your tax peace of mind!

II. The key to tax peace of mind: The arm's length principle

The most important rule for transactions between related parties is the so-called arm's length principle. What does this mean? Simply put, the price you charge for the rent must be the same as you would agree with an independent, unrelated party. The tax authority will always ask: "How much would an unrelated tenant pay for this property?"

What to watch out for:

• Customary rent: Determining the "customary" rent is crucial. It needs to be substantiated by comparison with similar rents in the given location. No "friendly" discounts!

• Income tax: Rental income is normally taxed for legal entities.

• VAT on rent: Be careful, while property rental is generally exempt from VAT under Czech legislation, there are important exceptions! If you are both VAT payers and the rented property is not used for housing, you can agree to apply VAT. This may allow the landlord to deduct input VAT, but at the same time, you must pay output VAT. For residential rentals, the exemption is always mandatory.

• Accounting and depreciation: You can account for costs associated with the property, as well as asset depreciation.

III. You face hefty fines and tax assessments!

Failure to comply with the arm's length principle and its associated rules has very serious consequences. The tax authority scrutinizes these transactions very carefully.

What happens if you make a mistake?

• Tax assessment: The authority can assess additional income tax on the difference between your "friendly" price and the customary price.

• Penalties: An automatic 20% penalty is added to the assessed tax.

• Late payment interest: Plus, late payment interest on the assessed amount.

• Fines: For late filing of the related party transactions overview.

• Liability of executives: In extreme cases, it can even constitute a breach of the duty of due managerial care and lead to personal liability of the executives!

The myth that can ruin you: Many entrepreneurs mistakenly believe that no one scrutinizes "in-house" transactions, or that "just any" lease agreement is sufficient. This is a huge mistake! It is precisely these transactions that are under the microscope of the Czech Financial Administration.

IV. How to do it right: A step-by-step guide to safe renting

To avoid the problems Mr. Novák faced and ensure your peace of mind, proceed systematically:

1. Thorough analysis and documentation:

   • Comparative analysis: Determine the real market rent. This is not just an estimate, but a qualified analysis of similar properties.

   • Transfer pricing documentation: Although not explicitly mandatory under Czech legislation, it is crucial for defending your prices before the authorities. It should describe in detail how you determined the price and why it is at arm's length.

2. A contract with an "arm's length" spirit:

   • The lease agreement must reflect the arm's length principle. It should include clauses for regular rent reviews (e.g., an inflation clause, but with regard to market conditions).

3. Corporate approval: For significant transactions, do not forget the approval of the general meeting.

4. Ongoing review: Regularly evaluate whether the set rent is still at market level. The market evolves!

5. Mandatory reporting: Do not forget to fill out the "Overview of Transactions with Related Parties" in your tax return if you meet the given criteria (e.g., a certain turnover or asset value)

V. Need certainty? Entrust it to the experts!

The issue of property rental between related parties is complex and has many hidden pitfalls. A mistake can cost you thousands, or even tens of thousands of euros. An experienced Prague-based lawyer will help you:

• Analyze your specific situation and identify risks.

• Set up an optimal and legal structure for the rental relationship.

• Prepare a robust lease agreement and the necessary transfer pricing documentation.

• Represent you during tax audits.

Don't play with fire when it comes to your assets! An investment in legal advice pays off many times over in this case. Contact us for a no-obligation consultation and ensure your peace of mind.