Taxation of Security Deposits in Lease Agreements – New Ruling by the Tax and Customs Authority – PMCG – Sociedade de Advogados SP RL

Taxation of Security Deposits in Lease Agreements – New Ruling by the Tax and Customs Authority

The Tax and Customs Authority recently released Circular Letter No. 20256/2023, aimed at clarifying the tax treatment of security deposits in lease agreements under the Individual Income Tax (IRS) regime.

Based on directives issued by the Deputy Director-General of Income Tax Management, this document presents a new interpretation that seeks to standardize procedures regarding the taxation of security deposits in lease agreements.

According to the circular letter, when a lease agreement is signed, the parties may agree to receive payments in the form of both advance rent and a security deposit. While advance rent represents prepayment of future rental income, the security deposit is intended to ensure the fulfillment of obligations arising from the lease, such as rent payments and potential damages to the property.

The circular letter establishes that, for tax purposes, the definition of rental income under the IRS regime is broader than the concept used in civil law. It states that rental income includes not only actual rent payments but also amounts related to the use of the property and related services.

Therefore, the Tax and Customs Authority concludes that security deposits should be considered as rental income for IRS purposes in the year they are received. The reasoning behind this decision is that security deposits constitute an increase in the lessor’s assets, affecting their taxable capacity in the year of receipt.

Furthermore, the circular letter explains that entities with organized accounting systems are obliged to withhold tax, generally at a rate of 25%, on gross income owed to others, including security deposits. In the event of a security deposit refund to the tenant, the refund may be considered an expense borne by the lessor and should be reported in the appropriate section (Annex F) of the tax return for the year in which the refund occurs.

This new ruling provides clarity and a standardized approach to the taxation of security deposits in lease agreements, ensuring compliance with the IRS regulations and promoting consistent practices among taxpayers and tax authorities.