Personal to Corporate Leasing: Tax Traps and How to Avoid Them

It is common practice for a partner or director of a company to lease property, a vehicle or equipment to the company in which they hold an interest, in their personal capacity. Despite its apparent simplicity, this arrangement carries significant tax risks if it is not structured correctly.

The typical scenario

Partner João has an office in the centre of Praia. He has set up a limited liability company and rents the office to the company for 50,000$00 per month. The aim is to «pay less tax» – but is that really the case?

Pitfall 1: Income reclassification

The tax authority may reclassify rental income as income from employment or self-employment if:

• the rent is manifestly higher than the market rate;
• The lease is a condition of the corporate or employment relationship;
• There is no written contract with clear terms and a defined duration.

Consequence: The income is subject to IRPS at progressive rates (up to 27.51%) rather than the 15% rate applicable to property income, or it may be reclassified as distributed profits subject to withholding tax.

Pitfall 2: VAT and business tax relief

If the lessor is registered with REMPE or is an ENI (self-employed person) not subject to VAT, the lessee company (under the standard scheme) you cannot deduct VAT from the income (because there is no VAT on the invoice). If the partner is registered for VAT under the standard scheme, they must issue an invoice with VAT at 15%, but:

• The company may only deduct VAT if the lease is strictly for business purposes;
• If the property is used for both residential and commercial purposes, the deduction is proportional;
• Input VAT on the rental of residential property is, as a general rule, non-deductible.

Pitfall 3: IRPC and tax-deductible expenses

For the tenant company, the rent is a tax-deductible expense IRPC provided that:

• The contract must be formal, in writing and registered (where required);
• The rent must correspond to the market value (as assessed by an independent body, if required);
• Payment must be made by bank transfer (not in cash).

If the tax authority considers the rent to be excessive, it adjusts it to market value and imposes surcharge on the shortfall, plus interest and fines.

Pitfall 4: Assignment of claims and thin capitalisation

If the lease is for a vehicle or equipment and the value is high, the tax authorities may question whether the transaction is, in fact, a hidden financing (thin capitalisation or hidden distribution). In this case, the income may be reclassified as interest or dividends, resulting in different tax treatment and a potential loss of tax relief for the company.

Pitfall 5: Social Security (INPS) and the landlord’s income tax

A partner who rents property to their company must declare the income for income tax purposes:

• Category of (Property Income): If the lease is for a property and the partner has no other related business activity.
• Category: (Business Income): Whether letting is a regular business activity or whether the partner is acting in the course of a business.

Incorrect classification leads to underpayments or overpayments, which then need to be rectified.

How to structure it correctly

1. Written contract: Including the term, value, review, intended use of the property/asset and termination clause.
2. Market value: Justify with an assessment or benchmark with similar rents in the area.
3. Official invoicing: Issue a receipt or invoice (depending on the landlord’s tax regime) showing VAT where applicable.
4. Bank transfer: Avoid using cash; maintain an audit trail.
5. Registration: Register the contract at the Citizens’ Helpdesk or the relevant department, where required.
6. Statement: Include the income in the landlord’s annual income tax return.

Structural alternative: contribution of the asset to the capital

Instead of renting, the partner can contribute the asset to the share capital of the company (contribution in kind). The company becomes the owner, depreciates the asset for IRPC purposes and eliminates the monthly income. The partner receives shares in return. This solution requires a valuation of the asset and a deed of transfer, but may be more tax-efficient in the medium term.

Conclusion

Hiring oneself out to a company is a high-risk tax transaction if it is informal or disproportionate. Correct legal and tax structuring – including the contract, market value, invoicing and tax returns – is essential to avoid reclassification, fines and disputes with the tax authorities.

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