Investing in Leased Space Can Be Profitable for Entrepreneurs

Author: dr. sc. Marija Zuber

October 31, 2025

An entrepreneur engaged in activities requiring business premises can operate in their own or in leased business space. Depending on the nature of the business, duration and intensity of use, and other influences, in both cases, the entrepreneur incurs necessary expenses for maintenance, and in some situations, also expenses for reconstruction and adaptation of the business premises, whether owned or leased.

Maintenance and/or Investment

Expenses related to maintenance, repairs, and possible adaptation of one’s own business premises can be classified as current or as investment maintenance and reconstruction. The difference lies in the impact on the corporate income tax base, or for individuals engaged in self-employment from which they pay income tax, the impact on the base of that tax. Current maintenance is a tax-deductible expense in the tax period in which those costs were incurred, and for income tax payers in the tax period in which they were paid. Investment maintenance involves modifications to the business premises that improve the quality of the space, increase capacity, and/or extend the useful life of the property. The costs of investment maintenance are not included in the total expenses for the year in which they were incurred; they increase the value of the property and are subject to depreciation calculation over the estimated useful life of the fixed asset.

In practice, it is sometimes debatable whether a certain expense is more appropriately considered current or investment maintenance. A classic example of current maintenance is the cost of painting walls, painting wooden parts of the building, sanding and varnishing existing parquet floors, and similar expenses that do not significantly affect the previous characteristics of the business premises. Examples of investment maintenance include roof reconstruction that extends the useful life of the building, installation of central heating, and similar. Adaptation involves more complex interventions that change the functionality and quality of the building, increase capacity, and extend the lifespan of the object. Depending on the nature of the expenses and the amount of the cost, the entrepreneur must assess for each individual case whether it is a period expense or expenses that will gradually be included in business expenses and reduce the tax base through depreciation calculation.

Lease Agreement

Conducting business activities in leased business premises is preceded by the conclusion of a lease agreement. The entrepreneur as the lessee and the lessor are required by the Law on Leasing and Sale of Business Premises to conclude a written agreement. The conclusion of a written agreement is mandatory when the lessor is a legal entity and when the lessor is a natural person. The law also prescribes the mandatory content of the agreement.

Among other things, the lease agreement must contain information about the business premises and the activity that will be conducted therein, if the space is in a building, then also provisions regarding the use of common areas, the duration of the agreement, and the amount of rent. The contracting parties may, but are not obliged to, agree on the obligation of the lessee to bear the costs of periodic maintenance of the space; if they do not agree on this, such an obligation of the lessee arises from the Law on Leasing. Rent and costs of current maintenance of business premises are recognized by the entrepreneur as tax-deductible expenses for the year in which they were incurred.

Consent of the Lessor

If the leased business premises need to be adapted, reconstructed, and adjusted for the activity that will be conducted therein, which is often necessary in practice even before the start of using the leased space, the parties to the lease agreement must agree on this. The lessee must have the consent of the lessor because the reconstruction of the building increases the value of the lessor’s property.

Various options are possible. One possibility is an agreement between the parties to the lease agreement that the investment in the lessor’s property is considered payment of the agreed rent, so in that case, the owner of the business space bears the costs of reconstructing the space, and the lessee offsets the rent obligation with the claim for the construction work performed.

If the Lessee is a Natural Person

In practice, it is more common for the agreement between the parties to the lease agreement to stipulate that the lessee assumes the obligation to pay rent and additionally invests in the reconstruction and adaptation of that space. Investment in someone else’s space is considered a long-term intangible asset according to accounting rules, the value of which is amortized over the period of use of someone else’s property. The amortization period cannot exceed the agreed duration of the lease. Upon expiration of the lease, the lessee is obliged to invoice the owner of the space for the amount by which the value of the lessor’s property has increased at the end of the lease period. However, if the lessor is a natural person, according to the position of the Tax Administration, it is considered that the natural person has realized income from property not only based on the rent paid by the lessee but also based on the investment that increased the value of the property, and this is not at the end of the lease period, but at the moment the investment was made.