Question:

Company A borrows a house from individual B at no cost. According to the lease agreement, Company A is allowed to construct, utilize, and lease the property for 10 years. After this period, Company A must return the house to B. Individual B is responsible for obtaining the construction permit and registering the constructed house in their land-use certificate.

So, can Company A deduct input VAT for the construction of the house? Are the construction costs, etc., considered deductible expenses when calculating corporate income tax (CIT)?

Does individual B have to fulfill obligations regarding personal income tax (PIT) declaration, calculation, and payment?

Answer:

The real estate project (rental house) is under the name of individual B, and the construction permit is also issued to individual B. Company A bears the construction costs and is allowed to use the property during the lease period. Therefore, in essence, the construction costs of the house are equivalent to the rental payment for the entire lease period.

However, since the fixed asset, which is the house, is not owned by Company A, the construction costs cannot be accounted for in the value of the investment project or as deductible expenses when calculating CIT. The input VAT on the construction costs of the house will not be deductible.

All construction costs and the input VAT incurred are considered prepaid rent to the landlord (individual B) and will be allocated over the prepaid period to be recorded as deductible expenses for Company A when calculating CIT.

In the case that during the business operation, repair costs of the house arise, and if the lease agreement stipulates that the lessee is responsible for repairing the asset during the lease period, then the repair costs of the leased fixed asset may be recorded as expenses or gradually allocated to expenses, but the maximum period should not exceed 3 years.

- Although the house is a fixed asset constructed and used by Company A during the lease period, it cannot be depreciated into expenses because, according to Clause 1, Article 9 of Circular 45/2013/TT-BTC (amended by Clause 4, Article 1 of Circular 147/2016/TT-BTC):

"Article 9. Principles of Fixed Asset Depreciation:

1. All fixed assets of the enterprise must be depreciated, except for the following fixed assets:

- Other fixed assets managed by the enterprise but not owned by the enterprise (except for finance-leased fixed assets).

- Fixed assets that are not managed, monitored, or recorded in the enterprise's accounting books."

- Article 6 of Circular 78/2014/TT-BTC (amended by Article 4 of Circular 96/2015/TT-BTC) also provides the following guidance:

"Article 4. Amendment and Supplementation of Article 6 of Circular 78/2014/TT-BTC (amended and supplemented by Clause 2, Article 6 of Circular 119/2014/TT-BTC and Article 1 of Circular 151/2014/TT-BTC) as follows:

Article 6. Deductible and Non-Deductible Expenses when Determining Taxable Income:

2. Non-deductible expenses when determining taxable income include:

2.2. Depreciation of fixed assets in the following cases:

…b) Depreciation of fixed assets without documents proving the ownership of the enterprise (except for finance-leased fixed assets)."

For individual B, although the house and land lease contract is set at 0 VND, the actual rent is the cost of constructing and renovating the house, which is paid by Company A. Therefore, the rent is determined based on the construction and renovation value of the house (if no additional payments are made between the two parties).

Individual B is responsible for fulfilling tax obligations on the income from renting out the house. If the lease contract does not specify the party responsible for fulfilling the tax obligations on the rental income, Company A must assume the responsibility for paying the personal income tax corresponding to the repair costs allocated monthly, quarterly, or annually.