However, the termination of the contract and payment of compensation “must be supported by a written agreement between the parties, as well as by a settlement document that, without any doubt, allows the value” of the compensation to be identified, warns the Tax Authorities.

The question was raised by a landlord who has a lease agreement prior to 1990, and who cannot transition to the New Urban Lease Regime (NRAU) either because the tenant is over 65 years old or because their income is very low, according to a report by ECO.

The landlord even tried to sell the house with the tenant but was unsuccessful. Therefore, “considered reaching an agreement with the tenant so that he renounces his contractual position in exchange for payment of compensation”.

Therefore, “it questions whether any compensation to the tenant as a way of terminating the contract can be considered as a charge within the scope of category G, under the terms of article 51, paragraph 1, paragraph a) of the IRS Code”. In other words, the taxpayer in question asks whether such expense can be deductible from the Income Tax payable on capital gains generated by the sale of the property.

The Tax Authority's instruction begins by clarifying that, “following the changes to the IRS Code introduced” by the 2014 reform of personal taxation, Law No. 82-E/2014, of December 31, article 51 now takes into account the following: “For the determination of capital gains subject to tax, the acquisition value shall be increased by the costs of […] demonstrably paid compensation for the onerous waiver of contractual positions or other rights inherent in contracts relating to such assets”.

The 2014 IRS reform project justified the extension of the deduction to compensation paid to tenants for breach of contract by the landlord, considering that the previous regime was “unjustifiably restrictive in terms of eligible expenses for the purposes of determining these capital gains”, when it “excludes the deductibility of expenses effectively and necessarily incurred to obtain them”.

“With the aim of ensuring fairer taxation, which meets the real contributory capacity, it is understood that the range of expenses to be considered in determining capital gains and losses should be expanded, to include compensation demonstrably paid for the onerous waiver of contractual positions or other rights relating to real estate”, according to the argument presented within the scope of the Income Tax reform project.

Thus, “as long as the compensation, for termination of the lease agreement, is demonstrably paid to the lessee/tenant, it may be considered eligible” to be deducted from the tax to be paid on the capital gain generated by the sale of the property, concludes the AT.

However, to this end, “the payment of said compensation must be supported by a written agreement between the parties, as well as by a settlement document that, without any doubt, allows the identification of the amount thereof, those involved in the transaction and the property in question and must be registered in Annex G, in the expenses and charges field, of the IRS Model 3 declaration, for the year of the sale of the property”, according to the Tax Authorities.