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Is Property Tax Paid on Rented Property?
When an enterprise leases a non-residential property for use in its business activities, certain specific considerations must be taken into account when determining the property tax treatment of that property. In particular, where the enterprise carries out repair or renovation works on the leased property and the related costs are not reimbursed by the lessor, it is important to correctly determine the tax treatment of such costs for both profit tax and property tax purposes.
According to Article 115.3 of the Tax Code, the deduction of repair expenses related to leased fixed assets from income is determined in accordance with the rules established by Articles 115.4–115.6-1 of the Tax Code. These provisions establish the circumstances in which repair expenses may be deducted from income and the period over which such expenses are amortized.
Under Article 115.6-1 of the Tax Code, expenses incurred for the repair of fixed assets that are not recorded on the lessee’s balance sheet and that are not offset against the rent or reimbursed by the lessor are deducted from income through amortization in proportional amounts over the years during the term of the lease agreement, but for a period of not less than five years.
In such cases, the expenses incurred for the repair of leased fixed assets are capitalized separately for each year and amortized in accordance with the procedure established by the relevant provision. In other words, instead of recognizing the repair expenses directly as expenses of the relevant year, the enterprise deducts them from income through proportional amortization over the period prescribed by the legislation.
However, an important point is that the capitalization of repair expenses for profit tax purposes does not mean that the leased property itself is recognized as a fixed asset on the enterprise’s balance sheet. The capitalization of these expenses only allows them to be amortized and deducted from income in accordance with the rules established for profit tax purposes.
A different criterion applies for property tax purposes. Under Article 197.1.3 of the Tax Code, fixed assets recorded on the balance sheets of enterprises and individual entrepreneurs, subject to the relevant statutory exemptions, constitute the object of property taxation.
According to Article 198.2 of the Tax Code, for enterprises, the tax base for property tax is the average annual residual value of the fixed assets recorded on the balance sheet. Therefore, one of the key criteria in determining property tax liability is whether the property is recorded on the enterprise’s balance sheet as a fixed asset.
In the case under consideration, the non-residential property has merely been leased by the enterprise and the relevant real estate has not been recorded on the enterprise’s balance sheet as a fixed asset. The repair expenses, meanwhile, are capitalized and amortized separately solely for profit tax purposes in accordance with Article 115.6-1 of the Tax Code.
Accordingly, the inclusion of these expenses in the “Capitalized expenses incurred for the repair of leased fixed assets” line of Appendix No. 1 to the Profit Tax Return does not constitute grounds for including such expenses in the property tax base.
In other words, the capitalization of repair expenses and the recognition of property as a fixed asset on the enterprise’s balance sheet are not the same concept and do not produce the same legal or tax consequences. The former concerns a special procedure for deducting expenses from income for profit tax purposes, while the latter concerns the determination of the object of property taxation.
Therefore, if the leased non-residential property is not recorded on the enterprise’s balance sheet as a fixed asset, that property is not included in the enterprise’s property tax base. Likewise, repair expenses that are capitalized and amortized solely for profit tax purposes do not constitute a separate object of property taxation.
Consequently, in the circumstances described above, the lessee is not required to calculate property tax in respect of these repair expenses or to submit a Property Tax Return on that basis.
Basis: Articles 115, 197, 198 and 201 of the Tax Code of the Republic of Azerbaijan.
When an enterprise leases a non-residential property for use in its business activities, certain specific considerations must be taken into account when determining the property tax treatment of that property. In particular, where the enterprise carries out repair or renovation works on the leased property and the related costs are not reimbursed by the lessor, it is important to correctly determine the tax treatment of such costs for both profit tax and property tax purposes.
According to Article 115.3 of the Tax Code, the deduction of repair expenses related to leased fixed assets from income is determined in accordance with the rules established by Articles 115.4–115.6-1 of the Tax Code. These provisions establish the circumstances in which repair expenses may be deducted from income and the period over which such expenses are amortized.
Under Article 115.6-1 of the Tax Code, expenses incurred for the repair of fixed assets that are not recorded on the lessee’s balance sheet and that are not offset against the rent or reimbursed by the lessor are deducted from income through amortization in proportional amounts over the years during the term of the lease agreement, but for a period of not less than five years.
In such cases, the expenses incurred for the repair of leased fixed assets are capitalized separately for each year and amortized in accordance with the procedure established by the relevant provision. In other words, instead of recognizing the repair expenses directly as expenses of the relevant year, the enterprise deducts them from income through proportional amortization over the period prescribed by the legislation.
However, an important point is that the capitalization of repair expenses for profit tax purposes does not mean that the leased property itself is recognized as a fixed asset on the enterprise’s balance sheet. The capitalization of these expenses only allows them to be amortized and deducted from income in accordance with the rules established for profit tax purposes.
A different criterion applies for property tax purposes. Under Article 197.1.3 of the Tax Code, fixed assets recorded on the balance sheets of enterprises and individual entrepreneurs, subject to the relevant statutory exemptions, constitute the object of property taxation.
According to Article 198.2 of the Tax Code, for enterprises, the tax base for property tax is the average annual residual value of the fixed assets recorded on the balance sheet. Therefore, one of the key criteria in determining property tax liability is whether the property is recorded on the enterprise’s balance sheet as a fixed asset.
In the case under consideration, the non-residential property has merely been leased by the enterprise and the relevant real estate has not been recorded on the enterprise’s balance sheet as a fixed asset. The repair expenses, meanwhile, are capitalized and amortized separately solely for profit tax purposes in accordance with Article 115.6-1 of the Tax Code.
Accordingly, the inclusion of these expenses in the “Capitalized expenses incurred for the repair of leased fixed assets” line of Appendix No. 1 to the Profit Tax Return does not constitute grounds for including such expenses in the property tax base.
In other words, the capitalization of repair expenses and the recognition of property as a fixed asset on the enterprise’s balance sheet are not the same concept and do not produce the same legal or tax consequences. The former concerns a special procedure for deducting expenses from income for profit tax purposes, while the latter concerns the determination of the object of property taxation.
Therefore, if the leased non-residential property is not recorded on the enterprise’s balance sheet as a fixed asset, that property is not included in the enterprise’s property tax base. Likewise, repair expenses that are capitalized and amortized solely for profit tax purposes do not constitute a separate object of property taxation.
Consequently, in the circumstances described above, the lessee is not required to calculate property tax in respect of these repair expenses or to submit a Property Tax Return on that basis.
Basis: Articles 115, 197, 198 and 201 of the Tax Code of the Republic of Azerbaijan.