The National Taxation Bureau of Taipei, Ministry of Finance, said that the default penalty collected by a business entity for the lessee terminates the lease early, which is deemed to be within the scope of the sales amount, should be included in the total rental revenue and invoiced in accordance with the relevant regulations.
The Bureau explained that according to Article 1 and Article 16 of the Value-Added and Non-Value-Added Business Tax Act, hereinafter referred to as “the Act”, sales of goods or services and imports of goods within the territory of the Republic of China shall be subject to business tax in accordance with the Act. The sales amount are the total consideration received by the business entity for the sale of goods or services, including all charges received by the business entity in addition to the proceeds from selling the goods or services. Therefore, the default penalty charged by the business entity for the lessee’s early termination of the lease is the charge in addition to the proceeds from selling the leasing services and falls within the scope of the sales amount under the Act. Therefore, it should be invoiced and subject to business tax in accordance with the relevant regulations.
For example, Company A leased out a property to Company B on February 1, 2020. The lease agreement provided for a three-year term, a monthly rent of NT$20,000, and three months' rent to be paid to the other party in the event that one party fails to perform the terms stipulated in the agreement. On June 15, 2021, Company B terminated the lease, and Company A charged Company B a default penalty of NT$60,000 in addition to the regular rent of NT$10,000 for that month (June 1 to June 15). Company A therefore should issue a uniform invoice for the total payment of NT$70,000 received and make the business tax payment accordingly.
The Bureau reminds the public that if a business entity collects a default penalty in accordance with the lease agreement, it should issue a uniform invoice and pay the relevant legal business tax in order to avoid possible deficiency penalties.
(Contact person: Revenue Assessor Wu of the First Legal Affairs Division; Telephone: 2311-3711 ext.1819)