Lease agreement between related parties
Rentals within the family are only recognized for tax purposes under specific conditions. In a recent decision, the Austrian Federal Finance Court (Bundesfinanzgericht, BFG) has clarified which requirements must be fulfilled in this regard.
The BFG, with reference to the established case law of the Austrian Supreme Administrative Court (Verwaltungsgerichtshof, VwGH), held that agreements between close relatives are only recognized for tax purposes if the following criteria are met:
- The agreement must be sufficiently evidenced externally (Publizitätswirkung),
- It must have a clear, definite and unambiguous content excluding any doubt,
- It must be concluded under the same terms and conditions as would have been agreed between unrelated third parties (arm’s length principle).
In addition, the actual execution of the agreement must be consistent with the above-mentioned criteria.
Recommendation
Agreements within a family must be structured in accordance with the arm’s length principle in order to be recognized for tax purposes. In practice, assessing whether a transaction meets this standard can be challenging. It is therefore advisable to seek professional advice prior to entering into such agreements in order to mitigate potential tax risks.