When you lease a property as retail or office space, unlike leasing it as a residence, the rent is subject to consumption tax. Here's an overview of what the introduction of the invoice system (inboisu seido) requires in practice.
- Rent for residential housing is, in principle, exempt from consumption tax, but rent for a commercial use — retail or office space, for example — is subject to consumption tax.
- An owner whose taxable sales exceed a certain threshold becomes a taxable business (kazei jigyōsha) for consumption tax, and adds consumption tax on top of the rent charged for commercial use.
- Under the invoice system, the tenant may need a qualified invoice (tekikaku seikyūsho, or "inboisu") issued by the landlord in order to claim the purchase tax credit (shiire zeigaku kōjo).
- Registering as a qualified invoice-issuing business (tekikaku seikyūsho hakkō jigyōsha) requires filing a registration application with the tax office.
- Remaining a tax-exempt business (menzei jigyōsha) could affect your contract terms with tenants — the rent amount or whether they can claim the credit — so it's advisable to think this through in advance.
The Difference Between Residential and Commercial Leasing
Under the Consumption Tax Act, rent for a property leased as a residence is, in principle, treated as tax-exempt. Rent for a commercial property — retail or office space, for example — is, on the other hand, subject to consumption tax. Even within the same rental business, the tax treatment differs depending on use, and that's the first thing to keep in mind. For a building that combines residential and retail space, it becomes practically important to divide the rent by use in advance.
Consumption Tax Applies to Commercial Rent
If the owner of a commercial property qualifies as a taxable business for consumption tax, the rent charged will have consumption tax added on top. Whether you qualify as a taxable business is determined by things like taxable sales during the base period (kijun kikan), so if you own both residential properties and retail or office space, you need to keep track of the sales scale of the commercial portion. Since how this determination works varies with your individual business makeup, we'd recommend sorting it out in consultation with your tax accountant.
The Invoice System and Registering as a Qualified Invoice-Issuing Business
Under the invoice system (the qualified invoice retention method), a tenant business, in principle, needs to retain a qualified invoice (tekikaku seikyūsho, or "inboisu") issued by the landlord in order to claim the purchase tax credit on the rent it pays. If the landlord isn't registered as a qualified invoice-issuing business, it could affect the tenant's tax burden. For lease agreements where payment is mainly by bank transfer, it's also common practice to satisfy the required entries for a qualified invoice by combining the lease agreement with the bankbook or transfer records.
The Impact of Remaining a Tax-Exempt Business
Some owners with low taxable sales choose to remain a tax-exempt business, but in that case the landlord can't issue a qualified invoice. Since it's conceivable that a tenant might raise the issue of a rent review or even reconsider signing the lease because it can no longer claim the purchase tax credit, an owner leasing commercial property needs to think through whether to register.
Practical Points to Confirm at the Time of Contract
When signing a lease for commercial property, it's advisable to make clear in the lease agreement and the important matters explanation (jūyō jikō setsumei) whether the rent is quoted tax-included or tax-excluded, and whether the landlord is registered as a qualified invoice-issuing business. We'd recommend working through the details of the system and how they apply to your situation in consultation with a tax accountant. Even when a management company handles the contract paperwork, tenants sometimes ask about registration status, so it's reassuring to share that information with them in advance.
Frequently Asked Questions
If a unit is leased as a residence that doubles as an office, what happens with consumption tax?
The treatment differs depending on the actual substance of the lease and the proportion of each use. The portion used for business purposes may be subject to tax, so it needs to be confirmed individually.
If I stay a tax-exempt business, does that mean I can no longer lease to tenants?
It doesn't mean you can no longer lease to them, but because the tenant can't claim the purchase tax credit, it could affect rent negotiations or contract terms. How much it affects things depends on the tenant's line of business.
Can anyone register as a qualified invoice-issuing business?
Any taxable business can register. If a tax-exempt business wants to register, it needs to elect to become a taxable business, among other procedures, so we'd recommend consulting a tax accountant.
Summary
When you lease a property as retail or office space, unlike a residential lease, consumption tax is charged on the rent and you also need to handle the invoice system. Whether to register as a qualified invoice-issuing business is best judged in consultation with a tax accountant, taking your relationship with tenants and your own taxable sales into account.