Fees not received? The Supreme Court has its say on taxable income


Emma Potter

A recent ruling by the Court of Cassation has placed emphasis on a fundamental aspect of the management of rental contracts: the attribution for tax purposes of unreceived rental payments and the importance of formally registering the termination of the contract.

This principle reiterates the obligation for landlords to declare rents until the official registration of the termination of the contract, regardless of their actual perception. This ruling raises crucial questions relating to property taxation and the management of tenancies, highlighting the implications for landlords and tenants in the commercial sector.

This article explores the dynamics and consequences of this ruling, providing an in-depth analysis of its implications for the commercial real estate industry.

The Supreme Court ruling

The recent order of the Supreme Court n. 746, issued on January 9, 2024shed light on a fundamental principle in the context of commercial leasing contracts: until the formal registration of the termination of the contract, unearned rents must be considered in the calculation of the lessor's taxable income.

This decision arises from a dispute regarding a notice of assessment relating to the 2007 tax year, in which a taxpayer had not declared income deriving from the commercial rental of a property, incorrectly assuming that, without recording the termination of the contract, such rentals would not should be included in taxable income.

The heart of the issue lies in the application of article 26 of the Consolidated Law on Income Taxes (TUIR), which establishes the presumption of receipt of rent, unless proof to the contrary is provided.

Article 26
Imputation of land income

Land income contributes, regardless of perception, to forming the overall income of the subjects who own the properties by way of ownership, emphyteusis, usufruct or other real right, except as established by the art. 30(2), for the tax period in which possession occurred. Income deriving from rental contracts of properties for residential use, if not received, do not contribute to forming the income, provided that the lack of receipt is proven by the eviction notice for non-payment or by the payment order. Article 21 applies to rents not collected by the lessor in the relevant tax periods and received in subsequent tax periods in relation to the income referred to in article 17, paragraph 1, letter n-bis).(1) A tax credit of the same amount is recognized for taxes paid on rent that has expired and not received as per the assessment carried out in the context of the jurisdictional procedure for validating eviction due to non-payment.

The Court of Cassation, confirming the decisions of the lower instances, underlined that the failure to formally register the termination of the contract does not exempt the landlord from the obligation to declare such income. Furthermore, the ruling reaffirms that rent not received due to arrears by the tenant remains taxable income until the formal termination of the contract or the provision of validation of the eviction.

Implications for landlords and tenants

The Supreme Court ruling has important implications for both landlords and tenants of commercial properties, highlighting the importance of correct fiscal and contractual management of commercial leases.

For landlords, the message is clear: the obligation to declare rental payments persists until the formal registration of the termination of the contract, regardless of the actual receipt of payments. This means that, in the absence of such registration, rent not received due to tenant arrears or other disputes continues to be considered taxable income, resulting in tax liabilities.

For tenants, on the other hand, the ruling highlights the importance of ensuring that any agreement relating to the termination of the tenancy or the termination of the contract is formally registered. This not only helps to clarify the lessor's tax position, but also ensures that any agreements reached are recognized and enforceable in legal and tax terms.

Furthermore, the decision accentuates the need for both parties to take a proactive approach in managing commercial leases. Landlords should consider implementing regular procedures for reviewing and recording any contractual changes, including termination, to avoid tax complications.

Similarly, tenants should ensure they communicate promptly and transparently with landlords about any changes in their circumstances which may affect the tenancy agreement.

The ruling also highlights the importance of maintaining accurate and complete documentation relating to lease agreements and any amendments or terminations. This documentation can serve as crucial evidence in the event of disputes or checks by the financial administration.

Final Considerations

Sentence no. 746 of 9 January 2024 of the Supreme Court represents a significant point of reference for the management of commercial leases, reiterating the need for scrupulous attention to fiscal and contractual procedures.

This decision highlights the importance of formally registering the termination of rental agreements to cease the obligation to declare rents not received as taxable income. This practice not only ensures tax compliance, but also provides legal clarity and security for both landlords and tenants.