An entrepreneur’s home (for example, a self-employed person) may be classified as business assets (may be designated as business assets). The condition is that part of the home – for example, a home office – is used for the business’s activities. The Supreme Court has recently confirmed that this also applies to a business owner’s rented property.
Rent is tax-deductible
The consequence of classifying the right to rent as business assets is that the total rental costs are deductible from the business profit. On the other hand, a private withdrawal (an addition to the profit) must be accounted for in respect of the private use of the property. This withdrawal is equal to a percentage of the property’s WOZ value. On balance, a deductible amount remains.
Study
The case heard by the Supreme Court concerns an entrepreneur working in the construction industry who carries out work – such as business development, planning of activities and bookkeeping – in a study within the property he rents. The study he uses for this purpose does not qualify as a separate part of the rented property. The rent to be deducted from the profit amounts to €9,835, and the flat-rate allowance for private use is €2,700, meaning that, on balance, €7,135 may be charged against the profit.
As the study in this case does not qualify as a separate part of the property, the value of the study must not be excluded from the WOZ value on which the private withdrawal is calculated. A separate workspace is deemed to exist where the study can be used independently of the dwelling (and, for example, has the necessary sanitary facilities).
Asset labelling
The classification as business assets relates to the property as a whole. Only where the parts of the property to be used for business purposes can be structurally separated must the individual parts be taken into account. Depending on the specific facts and circumstances, a property (or a part of a property that can be classified separately) qualifies as:
- required personal assets;
- required business capital;
- discretion (the business owner may then choose whether the property is classified as private assets or business assets).
A fixed asset is compulsory private wealth or compulsory business capacity, where the private or business use of the business asset is significantly predominant.
How much business use is required?
How much business use is required for a property not to be classified as mandatory private assets?
In an old judgement (dating from 1955), the Supreme Court ruled that, in the case of a property intended solely for 10% was used for business purposes, the option was available to classify the entire property as business assets. Where business use amounts to 10% or more, a property is therefore definitely ‘optional business assets’. The Supreme Court has never ruled on whether, even where business use is less than 10%, an option can still be exercised to classify the property as business assets.
This issue was not addressed in the recent judgment. This is because the party concerned and the Tax and Customs Administration had already agreed in a settlement agreement that the property qualified as ‘optional assets’. The judgment does not specify the size of the study in relation to the total floor area of the property.
Choice
If there is a case of ability to make choices The choice is made in the first financial year in which the property qualifies as such. The choice becomes final once the income tax assessment for that financial year is final and binding. Thereafter, the entrepreneur is bound by that choice, which may only be changed in the event of exceptional circumstances. A change in case law may constitute such an exceptional circumstance, but only where, for example, the Supreme Court reverses a previous ruling or a generally accepted interpretation is found to be outdated.
VAT
Can the Supreme Court’s ruling be extended to VAT, thereby allowing the VAT charged on the costs of the property to be deducted? However, no VAT is charged on the rent for a property, as this service is exempt from VAT. VAT charged on other costs relating to the property may be deducted, but only to the extent that these costs are incurred for the purpose of services subject to VAT.