Leasing as an economic activity - it's worth knowing

The market for real estate bought or built for the purpose of later renting is very popular. Many people try to secure their future in this way. In most cases, taxpayers tax the lease as private lease. However, landlords wonder when a rental becomes an economic activity. Leasing as an economic activity - this issue will be dealt with in the following article.

Taxation of rental with income tax

Pursuant to the provision of Art. 9 sec. 1 of the PIT Act, all types of income are subject to income tax, except for those listed in Art. 21, 52, 52a and 52c and the income from which the tax collection was abandoned pursuant to the provisions of the Tax Code.

The PIT Act clearly distinguishes between sources of income and the method of taxing income from individual sources.

Pursuant to the provisions of this Act - separate sources of income are:

• non-agricultural economic activity;

• rental, sublet, lease, sublease and other contracts of a similar nature, including lease, sublease of special departments of agricultural production and a farm or its components for non-agricultural purposes or for running special departments of agricultural production, with the exception of assets related to economic activity.

Thus, the lease was specified in the act as a separate source of income. However, the PIT Act specifies that income from business activity also includes income from rental, sublet, lease, sub-lease and other contracts of a similar nature, assets related to business activity (see Article 14 (2) (11) of the PIT Act) . Thus, the legislator distinguishes between two possibilities of taxing the lease with PIT income tax. The first way is called private rental, while the second - rental as part of business activity.

The lease is taxed on the terms specified in the Act, unless the taxpayers choose to tax in the form of a lump sum on revenues recorded in accordance with the principles specified in the Act on flat-rate income tax.

Economic activity - the PIT Act

Let us remind you that a business activity is one that is conducted:

• in order to achieve income - even if the potential loss resulting from this activity does not deprive it of the status of economic activity, the very intention to generate income is important;

• in a continuous manner - however, this condition should not be understood as the necessity to carry out an activity without interruption; the intention to repeat certain activities in order to achieve income is essential; the continuity, in the case of lease, is not determined by the rental of the property for several years, but by the repetition of the activities undertaken;

• in an organized manner - which means that the actions taken are subject to the applicable rules and norms, serve to achieve the goal and have an impact on the rational management of the possessed funds, and thus participation in economic turnover.

It should be noted that the Act on personal income tax does not make the recognition of a given activity as non-agricultural business activity conditional on the registration (notification to the relevant register) of this activity. Therefore, each action that meets the above-mentioned conditions constitutes, within the meaning of the provisions of the above-mentioned of the Act on non-agricultural economic activity, regardless of whether the taxpayer has registered it.

Importantly, activities are not considered to be non-agricultural economic activity if the following conditions are jointly met:

• responsibility towards third parties for the result of these activities and their performance, excluding liability for committing unlawful acts, shall be borne by the party ordering the performance of these activities;

• they are performed under the direction and in the place and time designated by the ordering party;

• performing these activities does not bear the economic risk associated with the business.

Taking into account the above definitions of economic activity, lease can certainly be considered an economic activity.

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Rental as an economic activity

As we have already described above, renting can be considered as an economic activity. Thus, in many cases, taxpayers have a problem whether the taxpayer should tax the lease as part of business activity.

Example 1.

The taxpayer invests his savings in the purchase of real estate in tourist destinations. He does not run a business. Initially, he purchased two properties by the sea. Currently it wants to buy five more properties. In such a case, should he tax the lease in the course of economic activity?

In this case, the taxpayer has the right to tax the letting of all real estate as private lettings.

The above is confirmed by the resolution of the Supreme Administrative Court of 24 May 2021 (reference number II FPS 1/21): "Income from rental, sublet, lease, sublet and other contracts of a similar nature are included without limitation to the source of income listed in art. 10 sec. 1 point 6 updof, unless they are an asset of a natural person, which was introduced by him to the property related to the performance of economic activity”.

Thus, the above resolution solves the problem of how to tax real estate purchased for lease.

After this resolution, it is the taxpayer who decides which source of income should be used for the lease he provides.

The above resolution applies only to natural persons who may have both private and business property.

The above causes the taxpayer to tax the rent depending on the property to which the rented property is included.

Summing up, the above resolution solved the dilemmas that taxpayers owning several real estate had so far had. In many cases, both the tax authorities and the courts considered that a large scale of lease exhausted the features of economic activity. Thus, taxpayers were ex officio ascribed to run a business.