Subletting: a good idea?

Through an agent you can let immovable property you own to your company. This way you can extract cash from your company. But is this such a good idea? It has advantages and disadvantages. We list them for you.

What is subletting?

A lets something to B, who on his turn lets it to C. The last letting (between B and C) is called 'subletting'. There is no contractual relationship between A and C. They are (in theory) strangers for each other. Between A and B is a normal letting agreement, such as is also the case between B and C.

Income from subletting is normally taxed as sundry income at a rate of 15%. Moreover it is not the income as such which is taxed, but the difference between the income received and the costs made to obtain this income (a.o. the let price paid yourself).

A director is owner of an immovable property and wants to let it to his company. He opts to let the immovable property to his brother first for a price of 1.000 per month. His brother lets the building on his turn back to the company of his brother for 1.100 per month. The sundry income in the hands of the brother amounts to only 100 per month (rent received - rent paid).

Why sublet?

Why would you make it so complicated by using an agent instead of letting directly to your company? There are two important reasons to opt for subletting by a third party.

Letting to a private person is more advantageous

A private person who lets immovable property to a company (which will use the building for its professional purposes) will be taxed on the actual received letting income. Letting to a private person (for private purposes) is taxed only on the cadastral income (KI) + 40%, irrespective the letting price.

Let's refer back to the example above. Imagine that the building of the director has a KI of 1.500. If the directors lets the building to his brother, he received a taxable immovable income of 2.100 (1.500+40%). If he would let it directly to his company for 1.000, he obtains an annual immovable income of 12.000 (the actual received letting price). In both cases he obtains the same income (12.000), but he will be taxed much higher when letting to his company.

Sometimes the letting price is professional income

A director can only ask a limited letting price from his 'own' company. The law foresees that a (higher) rent will not be taxed as immovable income, but as professional income. Professional income is not only taxed at a higher rate, it has also other disadvantages (social security contributions become due, lower lump sum cost deduction, ...).

The law prescribes a formula to calculate the 'normal rent' which a director can ask from is own company: 5/3 of the actualized KI. The actualization takes the changing prices into consideration and is determined annually by the King (for tax year 2012 = 3,97). With this formula the threshold is calculated. All amounts exceeding this threshold  are considered as professional income.

Returning to our previous example. This will give the following result: 1.500 (KI) x 3,97 x 5/3 = 9.925. This amount is the normal rent the director can ask from his company. If he asks 1.000 per month (12.000 per year) the threshold is exceeded. All amounts exceeding 9.925 are considered as extra professional income which the director receives from its company and is taxed higher.

Why not subletting?

It is clear that subletting can give an important tax advantage. However the tax authorities are suspicious. In most cases the agent (as in our example the brother of the director) has nothing to do with the letting/subletting. In fact the director wants to let to his company, but uses the agent only to obtain tax advantages. If you do not have a good reason to do so, the tax authorities will fight the construction with anti-avoidance measures.

If the tax authorities can do so successfully, the agent is deemed to not intervene. This means: higher immovable income and the risk that part of the rent will be taxed as professional income.

You are warned. If you still want to proceed with a letting/subletting construction, please bear the following items in mind (these tips are based on the position taken by case law - who exaggerates will be put in the wrong and then the tax authorities win).

make sure you have a written agreement and have it registered. So the contract has a fixed date. You can then later proof more easily you didn't simulate the situation.

respect the contractual relationships and pay in a correct manner. It is of key importance that payment is made in a correct way. The lessee should pay to the lessor. The sublessee should pay to the sublessor. You should take this step in between: it is very questionable that the sublessee (the company) pays directly to the initial lessor (the director). From a legal point of view, there is no contractual relationship between the lessor and the sublessee.

ask a normal price: if the agent asks a price just a couple of above the initial rent (e.g. director - brother 1000; brother - company 1050), is clear that it is not a profitable business for the agent (who normally wants to make profit on the sublease).