Question: Enterprise A borrows a house from individual B for a fee of VND 0, and according to the rental contract, enterprise A has the right to build, exploit, use and lease for 10 years. After this period, enterprise A will have to hand over the house to B. Individual B is responsible for applying for a construction permit and re-registering the status of the house that has been built in B's red book.

So, is enterprise A entitled to deduct input VAT for the input invoice for the construction of that house? Are construction costs, etc. included in deductible expenses when calculating corporate income tax?

Does individual B have to fulfill the obligation to declare, calculate and pay personal income tax?

Answer:

The real estate project (house for rent) is under the name of individual B, the construction permit is also issued to individual B. Enterprise A pays the cost of building the house and is allowed to use it during the rental period. Thus, the cost of building the house is essentially the rental for the entire rental period.

However, because the fixed asset is the house that is not owned by Enterprise A, the construction cost is not included in the investment value of the project or the cost of calculating corporate income tax, the input VAT of the house construction cost will not be deductible for VAT.

The entire construction cost and input VAT incurred are considered as prepaid rent to the lessor (individual B), allocated according to the number of years of prepayment to account for corporate income tax expenses of enterprise A.

In case there are house repair costs arising during the business process, if the asset lease contract stipulates that the lessee is responsible for repairing the asset during the lease term, the repair costs of the leased fixed assets are allowed to be accounted for as expenses or gradually allocated to expenses but the maximum time is not more than 03 years.

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

“Article 9. Principles of depreciation of fixed assets:

1. All existing 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 financial leased fixed assets).

- Fixed assets not managed, monitored, or accounted for in the enterprise's accounting books.”

- Article 6 of Circular No. 78/2014/TT-BTC (amended by Article 4 of Circular 96/2015/TT-BTC) also provides the following guidance:

“Article 4. Amend and supplement Article 6 of Circular No. 78/2014/TT-BTC (amended and supplemented in Clause 2, Article 6 of Circular No. 119/2014/TT-BTC and Article 1 of Circular No. 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 one of the following cases:

…b) Depreciation of fixed assets without documents proving ownership of the enterprise (except for fixed assets leased for financial purposes).”

For individual B, although the house and land lease contract is for 0 VND, in fact, the entire rental fee is used to build and renovate the house for rent, paid by enterprise A. Therefore, the rental fee is determined based on the value of the construction and renovation of the house (if both parties do not have any other payments).

Individual B is responsible for fulfilling tax obligations on income from renting the house. In case the house lease contract does not identify the person responsible for fulfilling tax obligations from rental income, enterprise A must be responsible for fulfilling personal income tax obligations corresponding to the repair money allocated each month, quarter, year.