Change Of Ownership Of The Leased Property
The Tenant’s Obligation Regarding Vat And Withholding Tax
When a property is leased, if the lessor is an individual, withholding tax liability arises in accordance with the Income Tax Law. If the lessor is a legal entity, there is no withholding tax liability under the Income Tax Law, Corporate Tax Law, and Tax Procedure Law, but VAT liability arises. In this context, the tenant’s obligations regarding rent payments may change if the lessor, who is an individual, transfers the property to a legal entity or if the lessor, who is a legal entity, transfers the property to an individual.
In lease agreements with individual property owners, the tenant generally agrees to pay the rent plus withholding tax. In agreements with corporate property owners, the tenant generally agrees to pay the rent plus VAT. Even if the agreement does not specify “rent plus VAT,” it is sometimes stated as “gross.” In such cases, the rent should be determined by excluding VAT.
When the property owner is an individual and the leased property is transferred to a legal entity, or when the property is leased to an individual and then transferred to a legal entity, it is important to determine the tenant’s liability regarding the rent amount and withholding tax-VAT. This is because if the tenant fails to pay the full amount, they may face various legal issues, including eviction and the payment of the outstanding rent.
The Supreme Court of Appeals has ruled on the tenant’s responsibilities in cases where the landlord transfers the property to a new owner in a manner that changes the withholding tax or VAT liability.
Supreme Court of Appeals, 3rd Civil Chamber, Case No. 2017/1390, Decision No. 2017/1046, Date: 09.02.2017
“… There is no dispute between the parties regarding the lease agreement dated April 1, 2009, with a two-year term, which serves as the basis for the proceedings and the judgment. The lease agreement stipulates that the monthly rent is net, and the VAT on the rent is the tenant’s responsibility. The agreement was signed between the defendant tenant and the previous owner company. The plaintiff, as the new owner, purchased the leased property on February 8, 2012. Since the plaintiff, who purchased the leased property, is an individual, the tenant’s liability to pay VAT ceased as of the date of purchase, and instead, the obligation to pay withholding tax arose. The plaintiff, the new owner, initiated enforcement proceedings on August 16, 2012, to collect the unpaid rent for the months of April and August 2012, based on the aforementioned principle, and demanded the collection of the rent difference of 2,725 TL. During the continuation of the lease agreement, if the property subject to the agreement changes hands and the previous owner was a taxpayer subject to corporate tax, but the new owner is subject to income tax rather than corporate tax upon purchase, the rent payable to the new owner is the net rent amount and its withholding tax. In this case, the Court should have determined the net rent amount to be paid by considering that the VAT liability of the lessor has been lifted and the withholding tax liability has arisen, calculated the net rent amount plus the withholding tax amount, and rendered a decision accordingly. However, the written decision was deemed incorrect and necessitated reversal…”
Court of Cassation, 6th Civil Chamber, Case No. 2014/5859, Decision No. 2014/7252, Date: 03.06.2014
“… There is no dispute between the plaintiff M.. A.Ş. and the original lessor M.. G.. Oto. Ltd. Şti. regarding the lease agreement dated December 1, 2011, with a term of 10 years. There is no dispute between the parties regarding the provision in the agreement stating that the rent amount is 3% of the monthly net sales of the store, excluding Value Added Tax (VAT), plus VAT, and that the minimum rent amount of 12,000 TL plus VAT was paid pursuant to the supplementary protocol dated 19.12.2011. The dispute concerns the amount of rent that should be paid in the event that the lessor, who is subject to Corporate Tax, sells the property to the plaintiff, who is subject to Income Tax.
Article 70 of the Income Tax Law introduces the withholding tax method for the taxation of income derived from real estate capital gains arising from the leasing of business premises. Withholding tax is the amount that the tenant must pay to the Tax Office on behalf of the lessor, calculated as the percentage specified in the law of the rent amount. The lessor is liable for withholding tax, while the tenant is responsible for it.
If the lessor is subject to Corporate Tax, the rent is determined as the rent amount plus VAT. If the initial lessor was subject to Corporate Tax and the leased income has been transferred to an individual subject to Income Tax, the rent payment will be subject to withholding tax in accordance with Article 94 of the Income Tax Law. Therefore, the tenant will no longer be liable for VAT, and will be responsible for paying the net rent amount plus withholding tax. Therefore, once the VAT liability is waived, the amount the tenant is required to pay is the net rent amount of 12,000 TL specified in the contract plus VAT. If the opposite were true, i.e., if the monthly rent including withholding tax were accepted as 12,000 TL as claimed by the defendant, this would mean reducing the tenant’s rent amount. In this case, the court should have ruled that the monthly gross rent is 12,000 TL plus VAT; however, since the decision was not made in writing, the ruling must be overturned…”
Court of Cassation 6th Civil Chamber, Case No. 2012/3293, Decision No. 2012/7668, Date: 22.05.2012
“…The defendant tenant and the previous owner, U … Construction Materials, Food Industry, Trade Ltd. Co., entered into a lease agreement dated January 15, 2010, with a ten-year term, under which the property owned by the aforementioned company was leased to the defendant. The monthly rent was agreed upon as 4,000-TL + VAT, and that the previous owner company received the rent from the tenant as 4,000-TL net rent + 18% VAT (720-TL), there is no dispute between the parties. The dispute concerns the amount of rent that should be paid if the property, which is subject to Corporate Tax, is sold to the plaintiff, who is subject to Income Tax, by the lessor. If the lessor is subject to Corporate Tax, the rent is determined as the rent amount plus VAT. If the initial lessor was subject to Corporate Tax and the property was subsequently transferred to a lessee subject to Income Tax, the rent payment would be subject to withholding tax under Article 94 of the Income Tax Law. Therefore, the lessee would no longer be liable for VAT and would be responsible for paying the net rent amount plus withholding tax. Therefore, once the VAT liability is waived, the amount the tenant is required to pay is the net rent amount of 4,000 TL specified in the contract plus withholding tax. The opposite, i.e., accepting the monthly rent amount of 4,000 TL including withholding tax as stated by the defendant, would mean reducing the tenant’s rent amount…”
As stated and explained above, when the lessor changes from an individual to a legal entity or from a legal entity to an individual, the net rent must be determined, and VAT or withholding tax must be reflected accordingly. It has been stated that situations that could result in the tenant paying less rent are not accepted.
Year: 2025
Application: Change Of Ownership Of The Leased Property The Tenant’s Obligation Regarding Vat And Withholding Tax
Lawyers: Mehmet Said Sarıbaş & Bilal Akbaba
E-mail: info@saribasakbaba.av.tr
Website: saribasakbaba.av.tr
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