Danove odpisovani technickeho zhodnoceni provedeneho podnajemcem

Tax depreciation of technical improvements made by a sublessee

Technical improvement ("TI") on leased asset completed after 1 July 2017 may be depreciated for tax purposes not only by the lessee but also by the sublessee if the relevant conditions are met.

When depreciating the TI, the lessee follows the procedure set out for tangible asset and categorizes the TI to the tax depreciation group in which the leased tangible asset is categorized.

In order for the lessee to depreciate the TI for tax purposes, the following conditions must be met (simplified):

(i)      the lessee pays for the TI,

(ii)    the lessee has a written agreement (depreciation consent) by which the lessor (owner) grants the lessee the right to tax depreciation; and

(iii)   there is no increase in the lessor's purchase price of the asset by the expenses related to TI.

Effective from 1 July 2017, paragraph 7 was added to section 28 of the Income Tax Act, which provides for the possibility of depreciation of TI made by a sublessee.

"A taxpayer who is neither a lessee nor a user and to whom tangible asset has been provided for use (e.g. sublessee), TI on the tangible asset shall be treated similarly to the TI paid by the lessee. (...) For the purposes of this provision, the taxpayer to whom the tangible asset has been provided for use is in the position of a lessee and the taxpayer who has provided the property for use is in the position of a depreciator of the tangible asset."

Therefore, for a sublessee to tax-depreciate TI on subleased asset, the sublessee needs to have the lessee's consent to depreciate (i.e., from the subject in the middle of the contract).

To verify that the lessee is entitled to assign this right to the sublessee, it is advisable confirming that the lessee has also received consent to depreciation from the lessor (this right may be stated, for example, directly in the lease agreement or in a separate document).

In practice, the question of whether the lessee must obtain consent to depreciation in the taxable period or whether it is sufficient to obtain it by the tax return filing deadline is often discussed. Within the coordination committee (HERE) of the Chamber of Tax Advisors and the General Financial Directorate it was confirmed that the lessee may start tax depreciation of the TI only in the taxable period in which it has fulfilled all the conditions stipulated by the ITA, including obtaining written consent to depreciation.

For completeness, we would like to point out that the conclusions of the coordination committees are not legally binding, but tax authorities generally respect them in practice. We also emphasize that the above brief commentary cannot replace a tax assessment of a particular situation.

Whether your company is in the position of a lessee or sublessee, we recommend that you carefully verify whether all the conditions for tax depreciation of TI are met before applying tax depreciation within the tax return. We will be happy to assist you in assessing your particular situation.

If you have any questions, please contact the authors of this article or the EY tax team with whom you regularly work.

Authors:

Vladislav Pejchal

Jana Kovářová