Not every company can afford to have its own office, warehouse or production department. That is why the premises are rented for temporary use, i.e. for a fee. The rental property needs repair sooner or later. Who should pay for it and do it? What tax consequences should not be forgotten is in the following.
Who should repair the rented premises
As it is known, the current repair is performed by the lessee at his/her own expense, and the main repair – by the lessor at his/her own expense (Art.776 of the Civil Code of Ukraine, hereinafter – the CCU). However, other conditions could be set in the contract. For example, to provide for the overhaul by the tenant at his/her expense, with further reimbursement of the cost of the work or the deduction of funds spent on the repair, to the expense of the rent.
If the rental property does not need repair, and the tenant wants to improve it, it is better to do so with the consent of the lessor (Art. 778 of the CCU). If the landlord agrees, then the tenant will be entitled to reimbursement of the costs incurred by them or to deduct their costs into the rent. If not, then the lessee cannot claim reimbursement.
All maintenance is subject to value added tax (hereinafter – VAT), but the final result depends on who pays for it.
VAT consequences for lessor
If the lessor pays for maintenance at his/her own expense, he/she will get the tax credit. Of course, on the basis of the tax invoice (hereinafter – TI) registered by the Unified Register of Tax Invoices (hereinafter – URTI) from the performer of repair works (para. 198.6, 201.10 of the Tax Code of Ukraine, hereinafter – TCU).
If the works are carried out at the expense of the lessee, and the lessor reimburses the costs or credits it to the rent, then the lessee will also be entitled to a tax credit. On the basis of the TI drawn up and registered in the URTI by the lessee.
If the TI is not registered in the URTI, the right to a tax credit does not arise.
VAT consequences for lessee
The lessee attributes the input VAT on the expenses incurred for repair and improvement of the leased item to the tax credit as a general procedure (paras. 198.3, 198.6 of TCU). Then, on the date of signing the act of acceptance and transfer of the completed works with the lessor, the lessee is obliged to calculate VAT liabilities (para. 187.1 of TCU). Moreover, irrespective of whether the monetary compensation of expenses will be received, or the credit against the rent payment, such a transaction is recorded in the VAT account of the tenant as the supply of works (paras. “b” of para. 185.1 of TCU). The tax base in this case is equal to the amount of compensation, but provided that it is not lower than the cost of maintenance works. If such works were performed by the lessee individually, then the VAT tax base cannot be lower than normal prices (para. 188.1 of TCU).
It is perfect when the lessor compensates to the lessee the cost for repairing or improving the rented premise. But there is another one variant. Let us suppose that the lessee carried out such work with the consent of the lessor, but the lessor did not compensate the cost for the lessee. In such circumstances, in case of return of the leased property, the cost of the repair or improvement performed by the lessee will be considered as a free service provided and subject to VAT of the tenant on a general basis (paras. “в” of para.14.1.185, para. “б” 185.1 of the TCU).
