When tax practice starts to diverge from legal frameworks, it not only undermines the principle of legality but also creates legal uncertainty for all taxpayers. Such a situation is reflected in the opinion of the Tax Administration dated 21 July 2025, concerning the (non-)application of the property tax exemption in the case of long-term leases intended for employee housing. More details about this opinion and its (non-)compliance with the law are provided below.

On 21 July 2025, the Tax Administration issued its opinion (class number: 410-20/25-01/110, ref. number: 513-07-21-01-25-2), stating that the property tax exemption does not apply if the property owner enters into a long-term lease agreement concluded for the purpose of housing employees (i.e., for the permanent residence of a person or persons in the apartment). The opinion does not specify that it would be limited to cases where the employer leases business premises without a defined purpose of use for the rented residential property. Rather, it refers explicitly to a long-term lease agreement concluded for employee housing. This description indicates that it is not a lease where the employer accommodates employees only occasionally or temporarily (e.g., during business travel), but rather a long-term lease agreement intended for employee housing, which implies long-term residence.

The Tax Administration interprets this as: “the property is used for employee housing, which means it is used for business purposes, and therefore, in this case, the condition for exemption from property tax on the basis of permanent residence is not met.” Accordingly, the Tax Administration’s argument for interpreting that the exemption from property tax based on permanent residence is not applicable is based on the interpretation that the property is used for business purposes.

Such an interpretation is arbitrary, not founded on objective criteria, and contradicts the interpretation of the nature and purpose of the lease in the context of other taxes. For example:

• If the property were truly used for business purposes, from the VAT perspective, an employer who is a VAT taxpayer would be entitled to deduct input VAT on those costs related to the property that relate to taxable supplies (and subject to other conditions for input VAT deduction). However, the employer is not entitled to this deduction when leasing a residential apartment for private use by an employee precisely because the lease is considered use of the property for private purposes.
• If the property were used for business purposes, from the personal income tax perspective, it would not be considered a personal benefit for the employee (although such benefits can, under certain conditions and restrictions, be paid tax-free, the tax exemption arises from a specific provision excluding this personal employee benefit from personal income taxation, not because it would not be a personal benefit). Also, the employer must report such leases as employee benefits precisely because the property is used for private purposes.

Thus, even though in the context of VAT and personal income tax it is clear and undisputed that the lease of an apartment by the employer for residential use by an employee is considered private use of the rented apartment (in accordance with the economic substance), in the context of property tax, the Tax Administration takes a completely different interpretation, treating it as business use, without any logical justification.

Considering the Local Taxes Act itself, it does not contain a specific definition of “use for business purposes” that could justify such an interpretation. This Act prescribes in Article 27, among other things:

“(1) Property tax is not payable on properties:

1. used for permanent residence,
2. leased based on a lease agreement for permanent residence.”

The condition for this property tax exemption is that the property is actually used for permanent residence, and there is no prescribed restriction regarding who concluded the lease agreement for permanent residence. Thus, it is not prescribed that the exemption would not apply if the lease agreement for permanent residence is concluded by the employer. Of course, it is important that the lease clearly defines the purpose of the lease as “for permanent residence” and that the apartment is actually used accordingly. Therefore, the Local Taxes Act ties the property tax exemption to the actual purpose of property use, and the Tax Administration’s opinion dated 21 July 2025, is not in line with this.

Moreover, according to one of the general principles of taxation, taxation should be based on the economic substance of each transaction. This general principle is contained in Article 11 of the General Tax Act and is reflected in the Local Taxes Act through the provision of Article 27, paragraph 3, which explicitly states that: “The fact of permanent residence is not considered proven solely by registration of residence at the property.” This provision means that formal registration of residence is not decisive, but the actual economic substance, i.e., what the space is truly used for, must be considered. Likewise, it does not matter who formally concluded the lease agreement, but what matters is whether the leased space is actually used for permanent residence.

The property tax regime (in its current form) has been justified by tax policy aimed at encouraging the availability of long-term rentals for employee housing. Also, the exemption from personal income tax on benefits provided by the employer enabling the employee’s permanent residence in a leased apartment has been justified by tax policy rewarding employees through facilitating housing, either through leases contracted by the employer or by reimbursing rental costs. However, the opinion of the Tax Administration dated 21 July 2025 is contrary even to such a tax policy, and moreover, it is neither based on the actual economic substance of the transaction nor on the applicable provisions of the legislation.