Expected Tax Changes Regarding Sublease and Lease Assignment


The wording of the Czech income tax act before the amendment described below did not address all the tax aspects of specific lease relations sufficiently, which complicated commercial arrangements. Most notably, this concerned sublease and lease assignments. To improve the situation, specific provisions have been included in the recent amendment of the income tax act.

A. Sublease

Under the legal framework before the amendment, the sub-lessee does not have a right to depreciate any technical improvement (i.e. essentially any fit-out works) made at its own expense, ultimately leading to a loss of any tax effect on such expenditures. Even if removed at the sublease end, no tax effect can be retained as the write-off of a sub-lessee’s technical improvement is not regarded as tax deductible.

The above-mentioned amendment aims to rectify the situation. The sub-lessee will be given the right to depreciate its newly-made technical improvements under the same conditions as within the tenant-landlord relationship. If the improvement is removed, its remaining tax value will be tax deductible at the lease end as well, provided further standard conditions are met. This should therefore help to clarify and simplify sub-lease arrangements.

B. Lease Assignment

The lease assignment situation is more complicated, the crucial part being whether the “new” tenant has the possibility to compensate the “old” tenant for the technical improvement made in the premises – and continue in its tax depreciation.

The amendment of the income tax act should have clarified this issue as well, at least based on the legislator’s explanatory report. However, the wording of the amended provisions fails to deliver. The lease assignments will therefore continue to present significant uncertainty for taxpayers.

To sum up, if you have had complications in sub-lease arrangements connected with the above, the amendment is likely to bring good news to you soon. However, with regards to any implications of lease assignments, the amendment does not seem to bring final clarity to the matter.

Should you have any questions regarding the issues above, please do not hesitate to contact Petr Karpeles, e-mail: petr.karpeles@tpa-group.cz.

Download Newsletter May 2017