Works carried out by the tenant: what taxation for the landlord?

When a tenant carries out improvement or construction works in a rented premise, these investments may, at the end of the lease, revert to the owner free of charge.
But from a tax perspective, does this gratuitous transfer constitute taxable income for the landlord?
The Council of State, in a decision of May 19, 2021 (no. 429332, SCI Saint Léonard), provided a clear and definitive answer for owners, landlords, and SCI managers.

The Facts: a Commercial Lease with a Works Takeover Clause

The SCI Saint Léonard had leased a commercial property complex.
The lease agreement stipulated that at the end of the lease, the owner would retain without compensation “all embellishments, improvements, and installations made by the lessee”.

During the lease, the tenant had undertaken significant improvement and renovation works, substantially increasing the property’s value.
At the end of the contract, these improvements were therefore gratuitously transferred to the SCI.

The tax authorities then considered that this gratuitous transfer amounted to taxable supplementary rent for the landlord.
The Council of State confirmed this position, specifying the method for assessing the profit to be recognized.

The Principle: Taxation as Supplementary Rent

The Council of State confirms that the landlord is taxable on the supplementary rent constituted by the gratuitous transfer of constructions or improvements made by the tenant.

This supplementary rent must be attributed to:

• to property income when the landlord is a natural person;

• or to taxable profit if the landlord is subject to corporate income tax (CIT), as is the case for an SCI subject to CIT.

This taxation is justified by the fact that, even without actual receipt of funds, the landlord enriches their assets through the added value created by the tenant.

Two Possible Approaches to Assess Profit

Two methods could be considered to calculate this supplementary rent:

1. Approach: “Cost to the Lessee”

The taxable profit corresponds to the cost incurred for the improvements made by the tenant (i.e., what they cost them).

2. Approach: “Profit for the Landlord”

The profit corresponds to the increase in market value that these improvements bring to the property at the end of the lease.

The Council of State adopted the second approach:
the taxable supplementary rent must be assessed at the actual added value for the landlord, and not at the initial cost borne by the lessee.

A Logical and Balanced Solution

The Council of State’s reasoning is based on economic logic:

• The cost borne by the tenant does not necessarily reflect the actual asset gain for the owner.

• Only the final market value of the property allows for measuring the true profit realized by the landlord.

In other words, just because a tenant spends €100,000 on works does not mean the property actually gains €100,000 in value.
If the improvements are specific or difficult to reuse, the added value for the landlord may be much lower.

The Council of State therefore specifies that taxation must be proportionate to the actual capital gain of the property.

Practical Consequences for Landlords and SCIs

This case law has several concrete implications:

1. Impact on SCIs.

SCIs subject to CIT must include this supplementary rent in their taxable profit, proportionally to the market value added by the works.
For SCIs subject to income tax, property income is increased by this supplement.

2. Role of the Usufructuary and Partners.

In the case judged, the Hathor company, usufructuary of the SCI shares, was taxed in proportion to its rights in the SCI.
This reminds us that taxation is distributed between the usufructuary and the bare owner, according to each one’s economic rights.

3. Necessity of a Professional Valuation.

The valuation of the increase in market value requires independent real estate expertise, particularly during:

• the end of a commercial lease;

• or a transfer of SCI shares after works carried out by the tenant.

An Often Underestimated Tax Risk

Many landlords are unaware of this rule, thinking that an improvement made by the lessee has no tax implications.
However, the tax authorities now systematically consider this type of transfer as taxable income, even without financial flow.

In case of an audit, an upward adjustment of property income or the SCI’s profit may be applied, along with:

• late payment interest,

• and a 40% surcharge for under-declaration in case of bad faith.

A preventive tax audit is therefore strongly recommended to anticipate this type of situation.