Commercial lease processes involve a series of obligations that require careful attention from a tax perspective for both tenants and property owners. Unlike residential leases, commercial leases involve withholding tax and Value Added Tax (VAT) regulations. In this article, we discuss how withholding tax and VAT work in commercial leases, who is responsible for which obligations, and key points to keep in mind throughout the process.
Withholding Tax on Commercial Leases: Who, How Much, and How?
Withholding tax on commercial leases is the tax deduction made by the tenant from the rent paid to the property owner. Pursuant to Article 94 of the Income Tax Law, tenants engaged in commercial or professional activities are required to withhold 20% income tax from their commercial lease payments. This withholding is reported and paid by the tenant to the tax office via a summary tax return. The property owner, when reporting rental income at the end of the year, offsets this withholding paid by the tenant on their own behalf against the calculated tax.
The only exception to the withholding obligation is when the tenant’s income is determined under the simplified tax system. A tenant taxed under the simplified system does not withhold tax from business premises rent payments. Furthermore, if the tenant has not yet made a rent payment or has not recorded it as an expense in their accounts, the obligation to withhold tax does not arise.
The Difference Between Gross and Net Lease Agreements
In commercial lease agreements, the distinction between gross and net rent directly affects the amount of withholding tax to be paid. In a gross rent agreement, the amount stated in the contract is the gross rent, and a 20% withholding tax is calculated on this amount. For example, for a gross rent of 25,000 TL, the withholding tax is 5,000 TL, and 20,000 TL is paid to the property owner. In a net lease agreement, however, the gross rent is calculated based on the net amount paid to the property owner. For a net rent of 20,000 TL, the gross amount is calculated as 25,000 TL, and 5,000 TL in withholding tax is again deducted. In both cases, the tenant’s total cost is the same; however, clearly specifying in the contract whether it is a gross or net lease helps prevent potential disputes.
VAT Application for Commercial Leases
The application of VAT for commercial leases varies depending on the property owner’s tax status. Commercial leases by property owners who are individuals and do not have commercial or professional income are exempt from VAT, provided they are not part of an economic enterprise. In this case, the tenant only withholds tax and does not pay VAT.
However, if the property owner is a VAT taxpayer or if the leased property belongs to a legal entity, a 20% VAT is calculated on the rent. In this case, the tenant requests that a rent invoice be issued, and if the tenant is a VAT taxpayer, they may claim the VAT paid as a tax credit.
Reporting Rental Income and the Tax Return Threshold
The fact that commercial rental income is subject to withholding tax does not completely eliminate the property owner’s obligation to file a tax return. Property owners whose gross commercial rental income subject to withholding tax exceeds 330,000 TL for the year 2025 are required to file an annual income tax return. No tax return is required for rental income below this threshold; the withholding tax deducted by the tenant is considered the final tax.
When filing a tax return, the property owner may deduct 15% of the rental income using the flat-rate deduction method or deduct documented expenses using the actual expense method. Taxpayers who choose the flat-rate deduction method cannot switch to the actual expense method for two years. Additionally, unlike residential rentals, there is no exemption threshold for commercial rental income.
Withholding tax and VAT obligations for commercial rentals depend on the nature of the lease agreement and the property owner’s tax status. It is of great importance for the tenant to calculate withholding tax correctly and report it on time, and for the property owner to monitor the filing threshold and file a return when necessary, in order to avoid potential penalties.
To obtain detailed information on this subject and properly manage your tax obligations in your commercial property leasing processes, you can contact the expert team at Bu Müşavirlik. We are here to provide you with customized solutions.
