How to lease property through a sole proprietor: KVED, taxes, benefits, fines, PRRO/RRO

The author of the article: Denis Korablyov

Modified date: 08 November 2025

Renting out real estate is one of the most popular ways to get a stable passive income. But for individual entrepreneurs (IE), this can turn into a real quest with the tax authorities if you do not know all the rules and pitfalls. This article is your reliable navigator in the world of rental business for IEs. We will analyze in detail which of the single taxpayers have the right to rent out property, which KVEDs need to be added, who can and cannot rent out premises, and how to avoid fines so that your income remains legal and problem-free.

This article will be useful for sole proprietors (FOPs) of all groups, as well as for accountants, lawyers, beginner landlords, and those who plan to rent out property without risking fines or losing the simplified taxation system. If you are an FOP or simply a private individual who owns real estate and is considering earning passive income from renting it out, make sure to carefully review the key tax requirements, restrictions, and potential pitfalls. In this article, we will explain step by step which FOPs are legally entitled to rent out property, who else is allowed to do so, which NACE codes must be registered, and how to avoid fines or being transferred to the general taxation system. This material will also be helpful for those who are unsure whether it is better to register rental activity as an FOP or operate as a private individual, and what the consequences of each option are.

Who among sole proprietors can rent out premises?

Not only large companies can rent out premises, but also FOPs on the general taxation system, single tax payers of the second and third groups, and even private individuals. But let’s go step by step – starting with FOPs.

FOP of the 1st group cannot be a landlord. That’s it. But the 2nd and 3rd groups can! The same applies to those on the general system and to legal entities. However, there are important nuances to keep in mind.

First of all, single tax FOPs have area limits:

• land plot – up to 0.2 hectares
• residential property – up to 400 square meters
• commercial property – maximum 900 square meters

Important! These areas are not cumulative. You cannot rent out 400 meters of residential and 900 meters of commercial at the same time – that’s already a violation, and the tax office will quickly catch it. But FOPs on the general system and legal entities have no such restrictions. Two hectares, three buildings – no problem!

NACE code for renting out property

Next – the NACE code. To make everything official, you must have NACE 68.20 registered: “Rental and operation of own or leased real estate.” If you don’t have it – don’t even start, because it will already be a violation.
By the way, this NACE code is required only for the landlord, not the tenant!

Who can sole proprietors rent property to?

(By the way, you can find more examples of when you might be removed from the simplified tax system in our full video on the YouTube channel)

So – if you want to sleep peacefully and receive passive income without unnecessary problems – follow three simple rules: choose the correct group and check whether you have the right to rent out; be sure to register NACE code 68.20. And most importantly – carefully check to whom exactly you are renting out the property.

What to do if NACE code 68.20 is not registered? Does it mean a complete ban on renting out real estate?

In fact, the situation is a bit more flexible, and the tax authorities clearly confirm this. If you are a property owner but do not conduct rental activities as an FOP (meaning you do not have NACE 68.20), you still have the full right to rent out property simply as a private individual. It is your choice – whether to register as an FOP and work officially, or rent as an ordinary individual. Registering an FOP is not mandatory for renting out property.

However, if you already have an FOP with the registered NACE 68.20, the situation changes. Tax authorities emphasize: in this case, you cannot simultaneously rent out property as a private individual. To rent property outside the scope of entrepreneurial activity, you must first remove this NACE code from the registry. Otherwise, tax authorities may consider the entire rental activity as a business and charge the corresponding taxes.

Regarding land plots – here a special “land exemption” applies, confirmed by official consultations, which concerns agricultural land. For other types of property, the situation is stricter. Therefore, if you have doubts about renting residential or commercial property, it is recommended to seek consultation.

In addition, an FOP who is also a property owner is still considered a private individual. As such, a private individual is obliged to pay property tax on each square meter of property beyond the established exemptions – 60 m² for an apartment and 120 m² for a house. If the tax authority finds that the property is used for business, you may lose the exemptions. In practice, this happens quite often, so it is worth keeping in mind.

Also, don’t forget to submit Form 20-OPP – this is your signal to the tax authorities that you are renting out specific property and receiving income from it. This form is submitted once after registering ownership of the property. If you later sell the property or remove it from rental, the form must also be updated.

Can an FOP in the second group sublease rented premises?

Very often you can come across a myth on the internet that supposedly an FOP in the second group cannot sublease rented premises. But this is not true! The tax authorities explained that an FOP in the second group has full rights to sublease premises – both to individuals and sole proprietors – within the allowed area limits. However, pay attention to Article 291.4 of the Tax Code. FOPs in the first and second groups cannot provide intermediary services in the purchase, sale, rental, or valuation of real estate. So, if you plan to act as a realtor or intermediary – that is already for the third group.

Cash register and leasing

Also, remember about the cash register. Currently, tax authorities love to check its presence, especially if you are paid in cash or by card, since a fiscal receipt must be issued. However, if money is transferred directly to an IBAN, a cash register is not needed.

Leasing as an individual

In general, you have the right to lease real estate without FOP status – simply as an individual. And tax authorities do not object. They emphasize: it’s your choice – to operate through an FOP, or without it. But note: if you have an FOP with NACE code 68.20 officially leasing property, you cannot simultaneously lease property as an individual. You must first exclude this NACE code from your FOP.

What does this mean? If you lease property as an individual, your rental income is not considered entrepreneurial income. Tax on this income is charged under the rules for individuals: Personal Income Tax (PIT) – 18% and Military Levy – 5%. Importantly, the tenant acts as a tax agent in this case, withholding and remitting these taxes from your payments. If the tenant is an individual without tax agent status, the landlord declares the income independently in their annual tax return.

And remember: taxation of rental income as an individual significantly differs from taxation under the FOP single tax, since the fixed or percentage rates are usually lower for FOPs.

Leasing: partly as FOP, partly as an individual

When your rental business starts to grow and you want to scale up – renting out more space without overpaying taxes – it’s important not to try to “split” your assets between FOP and individual status. Tax authorities clearly forbid this. If you try to lease part of your property as an FOP and part as an individual, you can lose your single tax payer status. You would then have to lease everything only as an individual and pay 18% income tax plus 5% military levy on the entire rental income.

But there is another option if you scale the business seriously. Part of the property can be leased as an FOP, and another part – as a legal entity on the simplified taxation system. This is especially convenient for the 3rd group, as there are no area limits, only an annual income limit.

If you lease everything as an individual, there are two scenarios. First – the tenant is another individual. Then you file your annual tax return and pay 18% income tax and 5% military levy. The second scenario – if the tenant is an FOP or a legal entity. Then they become your tax agents: they withhold and transfer the taxes from your payments, file form 4DF, and you receive the “net” amount to your account.

If you don’t want to suddenly switch to the general taxation system and get “surprises” from the tax authorities, don’t experiment with different property distribution schemes. It’s better to consult with an accountant and choose the optimal cooperation format at the very start of scaling.

Utilities and rent

And, returning to FOPs, let’s remind about the nuance of utility payments. Often, landlords provide tenants with generators and want to charge separately for electricity. But electricity is a related product, and this can lead to losing simplified taxation. The simplest and safest option is to include all utility payments in the total rental price to avoid risks. And if you need details on how to indicate it in payment purposes, you can watch our video on the channel.

Security deposit and rent

Finally, let’s remind about one more point – the security deposit. Tenants pay it to confirm their intentions. Tax authorities consider it FOP income at the moment of receiving it and don’t allow reducing income if the deposit is later returned. That’s why it’s better to specify that the deposit, for example, goes towards the payment of the last month’s rent.

And don’t fall for schemes with a minimal symbolic rent payment – the tax authorities have methods for determining minimum prices and will recalculate your rent up to that minimum during an audit. It’s better to indicate the actual market value to avoid problems.

Useful video

Play

Conclusion

Leasing property is a convenient tool for passive income, but only if legal and tax formalities are handled correctly.
Let’s summarize the main points:

• FOP of group 1 cannot lease property.
  
• FOP of group 2 – only to individuals and single tax payers (groups 1-3).
  
• FOP of group 3 and the general taxation system – can lease to anyone.
  
• NACE code 68.20 is mandatory – otherwise leasing as an FOP is not allowed.
  
• If you lease as an individual – expect rates of 18% income tax + 5% military levy.
  
• Do not try to “split” properties between FOP and individual – this risks losing simplified taxation.
  
• Utility payments, security deposits, and form 20-OPP – all these details matter.

Renting is not only about square meters – it’s about smart planning and complying with tax rules. To avoid fines and issues, it’s better to consult a specialist once and sort everything out. Have questions? Ask us!