Taxes when renting an office: what do entrepreneurs need to know?

Renting office space is a common practice for business, but it involves a number of tax nuances. It is important for entrepreneurs to understand what taxes arise in lease relations in 2024-2025, how to properly formalize a contract and avoid risks. In this analytical article, we will consider the taxation of office rent from the tenant’s perspective—from individual entrepreneurs to LLCs, the taxation of payments to individuals, features of working with landlords who are not VAT payers, as well as the consequences of undocumented rentals or cash payments. The material is presented in a business blog format with practical examples for better understanding.

Taxes for the Tenant Depending on Business Form (Sole Proprietor, LLC, etc.)

The tax burden for an office tenant depends on the taxation system under which they operate and the status of the landlord. In general, office rent is included in the business expenses, but the procedure for the taxation of these expenses is different depending on the situation:

• Sole Proprietor on the unified tax (Group 2 or 3): Rent does not affect the amount of the unified tax, as this tax is paid on revenue at a fixed rate. A Group 2 unified tax payer pays a fixed amount (up to 20% of the minimum wage) regardless of expenses. A Group 3 unified tax payer pays 5% of income (or 3% + VAT) and also does not consider expenses when calculating the tax. Thus, for unified tax payers, rent is primarily a financial burden, not a factor in tax calculation. Nonetheless, it is advisable to document office expenses to avoid questions during an audit regarding the reality of the business.
• Sole Proprietor on the general system: For an entrepreneur on the general system, rent is included in expenses, which reduces taxable net income. The general system FOP pays 18% personal income tax (PIT) and 1.5% military tax on the net profit (the difference between revenue and expenses) buh.ligazakon.net. For example, if a sole proprietor earned 100,000 UAH and spent 20,000 UAH on office rent, the tax will be paid on the net income of 80,000 UAH. This allows for a 19.5% saving on the rent amount (in this case, about 3,900 UAH). Conclusion: Officially documented office rent is beneficial for the general system FOP, as it reduces the tax base.
• LLC and other legal entities on the general system (corporate profit tax): Office rent is included in the company's expenses. This decreases the financial result before tax, and hence, the amount of corporate profit tax (at 18%). Thus, rent actually reduces the profit subject to taxation. To recognize the expense, properly prepared documents are required: lease agreement, act of handover-acceptance (if provided), invoices, and payment documents confirming the rent payment.
• Entities that are VAT payers: If the tenant is registered as a VAT payer, they can receive a VAT credit on the VAT paid as part of rent, but only if the landlord is also a VAT payer and issues a tax invoice. That is, if the landlord charges VAT, the tenant includes the paid 20% VAT in their VAT credit and reduces their VAT liability. Example: If the monthly rent is 12,000 UAH (including 2,000 UAH VAT) from a VAT payer, the company tenant pays 12,000 UAH but gets 2,000 UAH refunded as a VAT credit, so the real expense is 10,000 UAH (excluding VAT). If the landlord is not a VAT payer, VAT is not applied—the tenant only pays the rent amount and receives no VAT credit. Therefore, for VAT payers, it is more beneficial to have a landlord who is a VAT payer, while for unified tax payers or non-VAT payers, it is better to work with non-VAT payer landlords to avoid paying an extra 20%.

Important: The tenant's tax obligations may include not only its own taxes (such as single tax or income tax), but also taxes paid on behalf of the landlord. In particular, when a company rents an office from an ordinary individual (not an individual entrepreneur), it acts as a tax agent for such a landlord. This means that the tenant is obliged to calculate and withhold 18% personal income tax and 1.5% military duty from the amount paid and transfer them to the budget. More details on this can be found in the next section.

Renting an Office from a Private Individual: Taxation of the Landlord's Income

Situations where an office is owned by a private individual (citizen) and is rented by a business are quite common. In this case, a specific taxation procedure arises because the income from renting out property is subject to personal income tax and military levy. The obligation to withhold and pay these taxes lies with the tenant (legal entity or sole proprietor) who acts as the tax agent for the landlord-citizen. Let's look at the main rules of taxation for rent payments received by a private individual:

• Tax Rates. Income from renting real estate is taxed at the rate of 18% personal income tax (PIT) according to clause 164.2.5 of the Tax Code of Ukraine. In addition, a 1.5% military levy is withheld, making the total tax burden on the payment to the individual 19.5%.
  Example calculation: if the rent is 10,000 UAH per month, the tenant must withhold 1,800 UAH in PIT and 150 UAH in military levy (a total of 1,950 UAH) and transfer these to the budget. As a result, the owner receives "in hand" 8,050 UAH after taxation. These taxes are paid to the local budget at the tenant’s place of registration. When making the tax payment, it is important to indicate the right purpose of the payment and budget classification code.
• Deadlines for Paying Taxes. The Tax Code sets special deadlines for transferring withheld amounts depending on the form of payment. If the rent is paid to the landlord’s bank account, taxes are paid simultaneously with the payment of income. If paid in cash through the company’s cash desk or in non-monetary form, then within 3 banking days after the payment. If the income is accrued but not yet paid to the individual, the withheld taxes must be transferred by the 30th day of the month following the month of accrual. In other words, even if the rent has not yet been paid to the individual, but the deadline for its accrual under the agreement has arrived, taxes should be paid in advance. This situation may arise if the contract provides for monthly accrual of rental payments. Therefore, entrepreneurs should pay attention to the contract wording regarding the moment the landlord’s income arises.
• Tax Agent Reporting. The amounts of rent paid to the individual and the withheld taxes are reflected by the tenant in the quarterly Tax Report (form 1DF, since 2021 unified reporting) — in Annex 4DF. Rent incomes are shown with income code "157". The tenant files this report quarterly with the tax authority. It is important to make sure both the paid income and the withheld 18% and 1.5% are reported; otherwise, there may be fines for understatement or non-submission of information.
• Social Security Tax (SSC) is not Accrued on Rent. Rent paid to a private individual is not subject to the single social contribution since a lease contract is not an employment relationship or service, but a transfer of property for use. The Tax Code specifically excludes such payments from the SSC base. Tax authorities also confirm that a lease contract is not the basis for SSC. Therefore, the tenant does not pay 22% SSC on rental amounts. Practical tip: in a lease contract with a private individual, it is better to avoid wording such as “providing rental services” or “services for the use of premises,” so inspection authorities don’t misinterpret the agreement as a service contract (GPC), for which SSC is accrued.
• Minimum Rent Amount. The law introduced the concept of a minimum rental charge for real estate, which is defined by local authorities. If the agreement specifies an extremely low rent, the tax authorities can require PIT to be paid on at least the minimum rent for the respective area in the region. Local governments annually establish the minimum monthly rental cost per square meter for different types of real estate. If the actual payment is lower, the tax is calculated on the minimum amount. However, if the local council has not set the minimum for the current year, the taxable base is the actual payment. For tenants, this means that paying a "friendly" low rent does not lower taxes for the owner: tax will still be withheld from the higher conditionally minimum amount. Therefore, it is recommended to set rent at a market level to avoid additional tax charges.

These rules apply in cases where the landlord is a regular private individual, not registered as an entrepreneur. In such situations, the tenant must always withhold 19.5% taxes from payments. It should also be remembered that the individual landlord receives income already net of these taxes, so both parties should take this into account when setting the rental amount. Frequently, contracts specify that the rent is indicated "excluding taxes," so the tax burden is actually carried by the tenant. This is done to encourage property owners to lease officially—companies find it easier to pay the tax themselves than for individuals to lose 19.5% of their income. As a result, many owners agree to register as sole proprietors (FOP) to rent out offices and receive the full rental amount without withholdings.

Renting an Office from a Sole Proprietor or Company: Special Aspects for Unified Tax and VAT Payers

Often, office premises are rented not from private individuals, but from FOPs (sole proprietors) or other companies (LLCs, private companies, etc.). These landlords pay taxes on their rental income themselves, so the settlement mechanism differs from those described earlier. In this case, the tenant does not withhold personal income tax (PIT) or military levy, as the payment is made to an entrepreneurial entity. According to clause 177.8 of the Tax Code of Ukraine, if the landlord provides proof of state registration as an FOP, the tax agent (tenant) does not withhold tax from the payments. A copy of an extract or certificate from the Unified State Register confirming FOP status is sufficient. This rule applies to both general system and unified tax system FOPs. For example, if the office owner is an FOP (regardless of their tax regime), the tenant pays the entire rent—without deducting 19.5% in taxes. In this scenario, the FOP landlord receives all income and pays taxes from their business activity independently.

What taxes does an FOP-landlord pay? This depends on their taxation system:

• FOP on the general system: The received rent is included in their business income. At the end of the year, they pay 18% PIT + 1.5% military levy on net income (after deducting allowed expenses). Expenses may include, for example, utility bills, maintenance, etc., provided they are properly documented. The single social contribution (SSC, 22% of the minimum wage per month) is paid by the FOP for themselves regardless of income. If the FOP is also a VAT payer, they add 20% VAT on the rent and issue a tax invoice to the tenant (who then adds it to their VAT credit). VAT collected from the tenant is paid to the budget after the reporting period.
• FOP on the unified tax: Pays much less tax on rental income—either a fixed rate (group 2) or 5% of received amounts (group 3, non-VAT). Military levy is not paid, and PIT is not withheld by the tax agent, as the income is taxed under the unified tax regime. The unified tax effectively replaces PIT and the military levy for FOPs. Example: FOP of group 3 at 5% rate received 10,000 UAH per month from a tenant—they keep the whole amount and only pay 500 UAH unified tax for it in their quarterly declaration. For tenants, this is simple: 10,000 UAH transferred—10,000 UAH reported as expenses, with no extra tax liabilities.
• FOP-unified-tax-payer who is also a VAT payer (group 3 at 3% rate): Adds VAT to the rent. For example, by contract: 10,000 UAH + 20% VAT = 12,000 UAH paid from the tenant's account. The entrepreneur pays 3% unified tax (300 UAH) and 20% VAT (2,000 UAH minus their VAT credit from expenses with VAT). For large VAT-paying tenants, this version is also fine, because they add 2,000 UAH to their own VAT credit.

Special notes for tenants: If you rent an office from an FOP, make sure you have a copy of the extract from the Unified State Register confirming the landlord’s registration as an FOP. This is your “ticket” to not having to withhold 19.5% taxes. Additionally, ensure that renting of real estate is among the landlord's registered business activities (KVED 68.20 — Leasing and operation of own or leased real estate). While the law does not directly require checking the landlord’s KVED codes, this precaution helps avoid situations where the FOP later claims that the property was rented as an individual, not as an entrepreneur. In case of an audit, having KVED 68.20 and the registration extract will confirm your right not to withhold PIT.

Why cooperate with FOPs or companies? For tenants, it is usually more convenient to rent offices from FOPs or companies than from private individuals. First, you do not have to pay tax on "behalf" of the landlord—the landlord covers their own tax obligations. Second, payments are made in full, so the owner receives more "in hand"—this can help negotiate a lower overall rent. There's also a practical element: payments to FOPs/companies go to their bank accounts or through a receipt from their cash register, making such expenses easier to document.

For unified tax payers (tenants and landlords): There are certain restrictions established by the Tax Code concerning rental activities on the simplified system. If your landlord is an FOP of group 2, they cannot legally lease to legal entities or FOPs on the general tax system. Group 2 is only allowed for transactions with individuals and simplified system payers. Therefore, if an LLC on the general system rents an office, the FOP landlord cannot remain in group 2—they must switch to group 3 or the general system. This point is often missed but is crucial: if tax authorities reveal a violation (group 2 FOP leasing to a general system business), the entrepreneur will be retroactively switched to the general tax system. For the tenant, this is a risk, as such a lease would be technically invalid and expenses might not be recognized. When concluding a contract, check the landlord's unified tax group and to whom they have legal right to offer rental services.

Furthermore, regardless of the FOP's tax group, there are limits on the area of real estate that can be leased out by unified tax payers. FOPs in groups 1-3 cannot rent out: land plots more than 0.2 hectares, residential premises over 400 sq.m, or non-residential premises over 900 sq.m. If the entrepreneur exceeds these limits (across all properties), they lose the right to the unified tax. For the tenant, this means possible contract changes: the landlord will either have to leave the simplified system (and possibly raise rent due to higher taxes) or reduce the rented area. So if you are planning to rent large office space from an FOP, make sure there are no issues with the limits. The law allows renting part of the property within the limits as an FOP, and the rest as a private individual under the general system, but tax authorities are vigilant and may strip unified tax status if double rentals are found. The optimal path is to act transparently and within the rules to avoid tax disputes.

Proper Execution of an Office Lease Agreement

Proper documentary arrangement of lease relations is a guarantee of tax security for the tenant. The office lease agreement must be concluded in written form and contain all essential terms provided by the law (the parties, object of the lease, term, amount and procedure of payment of the rent, etc.). Here are some tips regarding the conclusion and documentation of such an agreement:

1. Form of the agreement. For rental of office (non-residential) premises, the law requires notarization and state registration if the lease term is 3 years or more. That is, long-term agreements (from 36 months) must be notarized and entered into the State Register of Property Rights to Real Estate. If you want to avoid the hassle with a notary, a practical solution is to conclude a lease for 2 years and 11 months, and then, if needed, extend or redraw it — such a contract does not require notarization. However, even a short-term agreement must be drawn up in writing in two copies (one for each party). Carefully check that the agreement correctly states the details of the parties (for legal entities: name, EDRPOU code; for sole proprietors: full name, tax number; for individuals: full name, passport details, RNOKPP), address and characteristics of the premises (area, location), the amount of the rent and its payment schedule, terms for indexation or revision of the rent, liability for non-payment, the duration of the contract, and conditions for early termination.
2. Handover-acceptance act for the premises. After signing the agreement, the parties prepare a handover-acceptance act, in which they fix the transfer of the premises to the tenant in the prescribed condition, listing the property (if the transfer includes furniture or equipment). This act is crucial as proof of the start of the use of the premises and confirmation of the tenant's right to its operation. Without the act, there may be questions about the start date of the lease and rent accruals. At the end of the term or upon early return, an act of return of the premises to the landlord must be executed.
3. Primary documents for monthly payments. According to accounting requirements, every transaction must be confirmed by a primary document. Rent payments are no exception. If the landlord is a legal entity or sole proprietor, usually a bank payment order (for wire transfer) or a cash receipt (for cash payments) suffices as proof of payment. Some landlords additionally sign an act of services/lease rendered each month, but tax authorities often state that for rent it is not mandatory—an agreement and payment proof are enough. If the landlord is an individual, you should demand a receipt for any cash payment, or also issue a cash receipt. This protects the tenant, proving that money was in fact transferred to the owner. Remember: expenses without supporting documents are not recognized for tax purposes. The tax authority may remove the entire rental amount from expenses if there is no agreement or proof of payment, stating that the linkage of expenses to business activity was not shown.
4. Additional tax provisions. It is desirable to specify in the agreement who acts as the tax agent upon payment of rent (required if the landlord is an individual). As a rule, it is enough to refer to the law, but sometimes an explicit provision is included, that the tenant withholds taxes and pays them, with the balance going to the landlord. It is also possible to specify that the entrepreneur-landlord undertakes to independently pay taxes and duties from their entrepreneurial activity to avoid double interpretation. If the landlord is a VAT payer, discuss the rent amount separately: specify whether the amount is “exclusive of VAT” or “inclusive of VAT,” and whether 20% should be added to the base amount. This affects the tenant’s expenses and settlements. It is also worthwhile to stipulate terms for reimbursement of utility services: whether they are included in the rent or paid separately. Please note: if the tenant reimburses utility payments to a sole proprietor landlord separately (outside the rent), this is also taxable income for the sole proprietor. For this reason, parties often agree on a fixed rent which already includes an estimated utility amount, or make utility contracts directly in the tenant’s name.Verification of ownership rights. Although not strictly a tax aspect, you must ensure that the person leasing you the office has the right to do so. Request a copy of the property ownership certificate or an extract from the real estate register. If the landlord is acting via a representative (e.g., company director or authorized person), check the power of attorney or corporate documents. Cases of fraud with “pseudo-leases” are not uncommon, and tax consequences are secondary compared to the risk of losing money. However, even if premises are used without legal grounds, the tax authority may still demand payment of taxes (if money changed hands). Therefore, legal purity of the transaction is the key to trouble-free work in a leased office.

Consequences of Not Having a Contract or Using Cash Settlements

Unofficial rental carries risks both from a legal and tax perspective. Some people try to save money, making "gentlemen’s agreements" and paying rent in cash without any documents. Let’s look at what such choices can lead to:

• Expenses are not recognized for tax purposes. If you do not have a properly documented rental agreement, handover acts, and receipts, then according to the tax authorities, your office expenses... simply don’t exist. In the event of an audit, all payments for such a "grey" office will not be recognized as expenses. For profit tax payers, this means an artificial overstatement of profit and an extra 18% tax on the full rent amount. For sole proprietors on the general system, it means overstated net income and extra 19.5% PIT+military levy. In fact, the money has been paid, but you get no tax benefit—in fact, you’ll even overpay taxes. So, saving on paperwork turns into losses.
• Fines for not paying taxes. A private individual landlord who receives income unofficially evades paying taxes. If the tax authority detects such a fact, they will impose 18% PIT and 1.5% military levy in arrears, plus a fine of 25% of the unpaid tax amount (Article 127 of the Tax Code). In cases of large amounts, there may even be criminal liability: a fine from 85,000 to 170,000 UAH under Article 212 of the Criminal Code (for deliberate tax evasion in significant amounts). Generally, responsibility lies with the landlord as the tax payer. However, there are also risks for the tenant: the tax office can levy a fine on the tenant for failing to fulfill their obligations as a tax agent (25% of the amount of tax not withheld and not transferred to the budget). In other words, if a business was supposed to withhold 19.5% from payments to an individual but didn't, the business will be fined a quarter of this amount. In the event of an audit, inspectors may also refer information to the tax police for prosecution of the property owner.
• Limits on cash payments. Ukraine has legal cash payment limits. For settlements between a business (or FOP) and a private individual, there is a limit of 50,000 UAH per day. So if the monthly rent is high (say, 100,000 UAH), you cannot officially pay it in a single cash transaction—it must go through the bank. You could split it over several days at 50k UAH each, but such maneuvers may attract scrutiny from banks or tax authorities. For settlements between businesses/FOPs, the limit is even lower—10,000 UAH per day cv.tax.gov.ua. So paying rent in cash can easily exceed these rules. There are penalties for exceeding limits (for example, a fine of at least 1,700 UAH for violating cash payment procedures). Additionally, banks are required to monitor large cash withdrawals: if a business withdraws money to pay an individual, the bank may request supporting documents (contract, invoice). Without a valid contract, such documents can’t be produced, and the bank might block the transaction or notify the State Financial Monitoring Service. Cash payments without a contract will eventually come to light.
• No legal protection. If there is no rental contract, the tenant has no legal protection. The landlord may demand you vacate at any time, change terms, and you will not be able to defend your rights in court—formally, there is no contract. Likewise, in case of claims from the tax authority, you cannot prove the connection between your expenses and business activities. Moreover, an invalid (void) contract creates no legal consequences. For example, if a large contract should have been notarized but wasn’t, it can be declared void, and all rent payments under it may be considered groundless. As a result, the tenant will have to pay tax on the full rent amount, and the landlord may have to return the received money (in theory, the landlord may also not return it, citing the contract’s illegality, and then the tenant would have to recover it in court). So working without a contract is playing with fire for an entrepreneur.

Tax Benefits and Risks: What to Watch Out For

There are no specific tax benefits for office rental — rental income is taxed on general grounds. However, there are some positive points and legislative relaxations that are worth taking advantage of:

• Reducing the tax burden through expenses. As mentioned earlier, for profit tax payers and general system sole proprietors (FOPs), the rent reduces the tax base. This is a kind of "benefit", as every hryvnia spent on office rent saves 18 kopecks of profit tax (or 19.5 kopecks PIT+military levy for FOPs). Therefore, all office expenses—rent, utilities, repairs—should be properly documented to avoid overpaying taxes.
• Simplified system for landlords. If your landlord is still a private individual and is uncertain about how to pay taxes, you can recommend becoming an FOP on the unified tax. For you as a tenant, there is no direct tax advantage, but it simplifies settlements (no withholdings). For the property owner, however, the benefit is significant: instead of paying 19.5% on income, they pay 5% or even 0% (if they qualified for war-time benefits, when some FOPs were allowed to pay 2% unified tax, although as of the end of 2023 this benefit has been cancelled). As a result, the landlord may offer you a better price by operating officially. Joint optimization of the landlord’s and tenant’s taxes is the key to mutually beneficial cooperation.
• Risks of abusing benefits. You should be careful not to be caught under the definition of "tax avoidance". For example, some companies try to register employees as FOPs and "rent" their home offices in order to compensate part of their salary through rental payments without paying SSC (social security contributions). The tax authority monitors such schemes: if the rent clearly substitutes for salary, it can be qualified as evasion. In such cases, additional taxes and fines are imposed. Another example is free-of-charge rental: when premises are provided for free (or for a symbolic 1 hryvnia). For the landlord, this means no income (and no tax), but the tax authorities may treat this as the tenant receiving a gratuitous benefit that must be taxed (for legal entities — tax differences under transfer pricing or non-business activity; for individuals — additional benefit). The Tax Code explicitly sets a minimum rent threshold below which taxation will not fall. Therefore, it is best to avoid tricks such as "rental for 1 hryvnia"—they attract the attention of inspectors and may lead to taxes being reassessed at market rates.
• Martial law period and rental. In 2022-2023, some tax relaxations were introduced (such as 2% unified tax, a moratorium on audits, etc.), but there were no specific benefits concerning rental payments. However, some tenants were granted exemptions from paying rent for state or municipal property in frontline zones. If you’re renting a municipal office, check with your local authority about possible decisions on temporary rent exemptions or reductions—such decisions do happen and may create a kind of "tax benefit" for you, since rent charges are suspended. However, if rent is canceled, make sure this is documented by a decision from the property owner so that you don’t end up being taxed as if you’ve received free-of-charge services.

Tax aspects of office rental in Ukraine require attention, but with the right approach, do not create excessive burdens. Tenants should act transparently: sign official contracts, pay non-cash or within cash limits, and fulfill the role of tax agent if necessary. Landlords should choose the most optimal tax regime (FOP-unified tax or legal entity) to minimize taxes legitimately. Such cooperation benefits both sides: the business can safely account for expenses, reduce its tax liabilities, and operate legally, while the landlord receives income without fines and with the ability to officially confirm the income. Ultimately, office rental ceases to be a "headache" and becomes a regular business transaction, fully under the entrepreneur’s control.