Private real estate leasing: what about the purchase option?
Private real estate leasing is increasingly being presented as a tax-efficient way of withdrawing funds from a company. In practice, however, insufficient attention is often paid to the purchase option at the end of the lease agreement.
What is private real estate leasing?
The starting point is usually the same: the business owner is the legal owner of a property in a private capacity, often the building used by their company or a property they have recently purchased privately for that purpose.
The property is then leased to the company, which makes periodic payments to the business owner. The business owner essentially takes on the role of the bank: they finance the building and lease it to their own company. Just as with traditional financing, the periodic payments consist of a (tax-free) capital component and a (taxable) interest component.
Finally, at the end of the lease term, the company has an option to purchase the property.
Why is private real estate leasing attractive?
The appeal of private real estate leasing lies in the fact that the lease payments made by the company to the business owner consist of:
- a capital component that is received tax-free (provided certain conditions are met); and
- an interest component that is taxable as investment income and subject to 30% withholding tax.
In other words, subject to certain conditions, the business owner can receive the capital component of the lease tax-free throughout the term of the lease, which is obviously attractive.
The purchase option: an important consideration
At the end of the lease agreement, the company has an option to purchase the property. This is not a minor detail, but an essential feature of any leasing arrangement.
This is where things get complicated. Anyone who sets up this structure precisely because they want to keep the property in their private estate is unlikely to be keen on actually exercising the option at the end of the term. If the option is exercised, full ownership of the building passes to the company as lessee, often the exact opposite of what was intended. Moreover, transfer tax is due at that point, calculated on the value of the property at the time the option is exercised rather than on the (low) option price.
It may therefore seem tempting to simply let the option expire. From an economic perspective, however, this is far from straightforward…
What happens if the option is not exercised?
If the company does not exercise the purchase option, the property remains entirely in the hands of the business owner. The company is left empty-handed, despite having paid both capital and interest over all those years.
It therefore cannot be ruled out that, during a tax audit, the tax authorities may consider this a benefit in kind for the business owner. Given the amounts typically involved, which are taxable at progressive rates and increased by municipal surcharges, this can become a costly issue.
A carefully considered choice
Private real estate leasing can be a viable option, but only for the right reasons. It has its place when exercising the purchase option at the end of the lease term does not pose an obstacle. If it does, it is better to look for another solution.
Do you have questions about private real estate leasing or would you like to know what it could mean for your situation? Contact one of our experts for advice tailored to your needs.