A few weeks ago, in an internet group, I followed and got involved in the communication of accountants regarding the hidden profit payout, and that prompted me to write this blog.
Namely, it was about the attitude of the Tax Administration regarding the lease of business premises. What is it about?
In practice, more and more often new business entities (limited liability companies, simple limited liability companies) decide to initially work from their own home, i.e. use part of your own living space as a business space.
At the same time, they must know that, unlike trades where the business entity is equal to a natural person, with d.o.o. or j.d.o.o. it is about two different persons – legal (d.o.o. or j.d.o.o.) and physical (founder/owner/member of the company).
Due to this separation of legal and natural persons, if a legal person starts business in the premises of a natural person who is also its owner (and in most cases also the responsible person – the director), a mutual agreement on the lease of business premises must be concluded (it seems with itself, but legally it is not so).
Such a lease agreement must be reported by the owner – a natural person to the Tax Administration in order to deduct the corresponding property income tax. In accordance with positive regulations, the agreed rental price must be the market price, i.e. the price that would be realized in the market between unrelated persons.
In the aforementioned communication of the accountant from the beginning of the story, this price was disputed.
Namely, a lease agreement was originally drawn up with a lease price in an amount that the Tax Administration did not accept, with the explanation that it was a hidden payment of profit. The bookkeeper to whom this happened did not understand what it was all about, but it is actually very simple.
Hidden profit payouts are defined by the provisions of the Law on Profit Tax as:
• giving certain benefits to a shareholder or a member of the company or to persons connected with them for a fee lower than the market rate, including a more favorable interest rate;
• payment of a higher compensation to a shareholder or member of the company or persons connected with them for goods or services than the value of the goods, services or effects or benefits that the shareholder or member of the company or a person connected with them gave to the company;
• provision of goods or services to a shareholder or a member of the company or persons related to them in a value greater than the value of the goods, services or effects or benefits that the shareholder or member of the company or a person related to them gave to the company;
• providing the shareholder or member of the company or persons connected with them with other benefits for which there is no legal basis;
• deficits on assets above the amount determined by the decision of the Croatian Chamber of Commerce or the Croatian Chamber of Crafts, in the sense of regulations on value added tax, according to which no income tax is paid.
In short, hidden payments are the increase or decrease of the company’s assets so that shareholders or members of the company or persons connected with them are given/purchased goods or services at lower or higher prices than market prices, and they give/purchase goods or services without a legal basis.
In our case, the owner of the company – a natural person has two functions:
– As the owner of the company (d.o.o. or j.d.o.o.) he has the right to the payment of profit from business, which is taxable as capital income at a rate of 12% increased by the corresponding surcharge (depending on residence). Previously, the profit of the company that remains available to the owner was already taxed with a profit tax of 12% or 18% (depending on the amount of the company’s total income).
– As a renter of business premises, the same person is obliged to pay a flat tax on income from property, which is calculated by applying a rate of 12% increased by the corresponding surcharge on the base represented by the contracted amount of rent less 30%.
Mathematically, the amount of tax due in the second case is ultimately smaller for the owner – a natural person.
Consequently, if the owner of the company rents space for a price higher than the market price, the price will represent a higher cost for his company, the profit will be lower and the corresponding profit tax will be lower. The owner will have less left for the eventual payment of the profit, but he has already secured/paid a less taxable amount through the amount of the rent.
So, what the Tax Office noticed in our example is exactly that, through the increased rental price, the owner will get a part of the profit.
The Tax Administration has tables of acceptable rental prices by area, and before concluding a rental agreement, we advise you to contact the competent office of the Tax Administration and ask for information on the acceptable rental price per m2 in a certain city or part of the city. In most cases, you will receive feedback, conclude the contract at an acceptable price and there will be no problems.
But everything depends on the branch of the Tax Administration.
I know of cases where there is no reaction to a very high price, as well as cases where the agreed price is too low and it passes again…
For additional clarifications, help and information, of course, we are always at your disposal.