GDT defines lease-free grace periods for landlords
GDT defines lease-free grace periods for landlords
A rental tax grace period has now been granted to allow landlords’ tax exemptions during periods in which renovations to properties and other specified non-renting periods are granted to lessees within lease agreements, according to an official instruction released by the General Department of Taxation (GDT) this month.
The GDT’s clarifications seek to support taxpayers and those invested in the real estate sector, and improve transparency and compliance with rental tax laws.
Instruction No. 33000, dated September 18, 2024, applies to the situation in which the landlord grants an incoming tenant a grace period for the purposes of construction, renovation or other improvements to the property within the lease agreement, during which the tenant is not obliged to pay rental fees.
That prospective tenant negotiating the lease agreement may request such a lease-free period because construction, repair or other changes are necessary for them to use the rental property in the way they see fit.
However, traditionally such grace periods have faced scrutiny from the tax administration and been the subject of tax audit re-assessments.
Under such assessments, in some cases, the tax administration may still consider the grace period as taxable income of the property owner and thus subject to value-added tax (VAT), despite the fact that the property in question was not generating rental revenue for any party during the included lease-free grace period.
The landlord will, therefore, be less likely to grant such a lease period for improvements to the property, as they will still be subject to tax.
In turn, the potential lessee may not agree to the terms of the lease agreement without a grace period for improvements and other desired changes they deem necessary before occupying the property and paying full rental rates.
With the issuance of Instruction No. 33000, the GDT has now clarified the tax obligations in such a scenario, essentially allowing a limited tax-free grace period for such activities.
According to the GDT instruction, lease agreements for any property type are allowed to contain a period of time during which lease payments are not paid due to construction works, repair or other improvements to the property.
The GDT has confirmed that lease-free periods however are limited to 10 percent of the total lease period contracted by the parties in the lease agreement.
Therefore, for a five-year lease length, for example, a lease-free grace period of six months could be granted for renovations by the incoming tenant without incurring tax obligations.
However, the instruction stipulates that if the landlord wants to offer such a lease-free or reduced lease grace period, then they must submit the lease agreement to the GDT within 30 days after the signing.
During the 10 percent lease free period, the GDT has confirmed that no value added tax (VAT) will be charged by the authority, and the landlord will not face re-assessed VAT in a tax audit scenario, given they have followed the terms of Instruction No. 33000.
In the case that the grace period exceeds 10 percent of the total lease period, prior approval from the GDT will be required.
Notwithstanding the recent clarification included in Instruction No. 33000 this month, generally, tax on real estate rentals in Cambodia is levied at a rate of 10 percent of total real estate rent, per month.
Property rent refers to the gross wage contracted or agreed upon with the lessee, which pays respect to the market value of the property being leased.
The tax base for real estate fees therefore considers both monthly rental income and total rental revenue paid by the tenant and received by the property owner or entity.
Some exemptions from property tax do exist, including state property leases of embassies, international organizations, non-profit entities, and rentals costing below 500,000 KHR per month.
