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

The author of the article: Denis Korablyov

Modified date: 09 December 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 of all groups, accountants, lawyers, beginner landlords, and those who plan to rent out property – and do not want to get fines or lose their simplified taxation system. If you are a sole proprietor or just an individual owning real estate and considering the option of receiving passive income from renting it out – carefully review the key tax requirements, restrictions, and hidden pitfalls. 

In short: a sole proprietor of Group 2 can rent out not to everyone, a sole proprietor of Group 3 – to anyone, KVED 68.20 is mandatory, there are area limitations, and with the wrong taxation model you can lose the simplified system.

In this article I explain in detail who among sole proprietors has the right to rent property, to whom they are allowed to rent, which KVEDs must be registered, how to avoid fines and being “transferred” to the general taxation system. This material will also be useful for those who are unsure how to formalize rental activities – as a sole proprietor or as an individual, and what consequences each option has.

Which sole proprietors are allowed to rent premises

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

Sole proprietors of Group 1 cannot be a landlord. 

But Groups 2 and 3 – can! The same applies to general taxation and legal entities. However, there are important nuances worth considering.

First of all, simplified taxpayers have area restrictions:

Important! These areas are not summed up. You cannot rent out 400 meters of residential property plus 900 commercial – that is already a violation, and the tax authority will detect it quickly.
But sole proprietors on the general taxation system and legal entities – have no limits. Even two hectares, even three buildings – no problem!

KVED 68.20 for renting out property

To do everything officially, you must have KVED 68.20 “Renting and operating of own or leased real estate” registered. If you don’t have it – do not even start, because that will already be a violation.

*By the way, this KVED is required only for the landlord, not for the tenant!

To whom a sole proprietor can rent property: restrictions for Groups 1, 2 and 3

And here starts the most interesting part – who exactly can sole proprietors rent to?

• Group 3 sole proprietors can rent premises to anyone: a bank, a notary, a pharmacy, any legal entity – there are no restrictions.
• General taxation sole proprietors – same thing, full freedom.
• But Group 2 sole proprietors can rent premises only to other simplified taxpayers (Groups 1–2–3) or private individuals.
  Renting to a legal entity on the general system, a notary, or a government authority – is not allowed!

Imagine: a Group 2 sole proprietor rents out premises to a pharmacy. Seems fine, but a pharmacy is a legal entity on the general taxation system.
The tax authority will detect this instantly:

• first, they can revoke the simplified taxation system retroactively 

You can watch more examples of when you may be removed from the simplified taxation system in our full video on the YouTube channel.

• second, they will additionally charge a penalty rate of 15% unified tax on the entire income from such violation,
• and also automatically transfer you to the general taxation system (18% PIT + 5% military tax + lots of reporting).

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

What to do if KVED 68.20 is not registered? 

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 a sole proprietor (that is, you do not have KVED 68.20), you have every right to rent out property simply as an individual. It is your choice – whether to register as a sole proprietor and work officially, or rent as a regular person. Registering as a sole proprietor is not mandatory for renting out real estate.

However, if you already have a sole proprietorship with KVED 68.20 registered, the situation changes. Tax officials emphasize: in such a case, you cannot simultaneously rent out real estate as an individual. To switch to renting outside business activity, you must first remove this KVED from the registry. Otherwise, the tax authorities may consider all rental activity as business and charge the corresponding taxes.

Regarding land plots – there is a special “land exception,” confirmed by official consultations, which applies specifically to agricultural land. For other types of real estate, the situation is stricter. Therefore, if you have doubts about the rental status of residential or commercial property – we recommend consulting a specialist.

In addition, a sole proprietor is not the owner of the property – they only operate it. The owner is you, as an individual. And it is the individual who is obliged to pay the real estate tax for every square meter above the established benefits – 60 m² for apartments and 120 m² for houses. If the tax authority finds out that you are using the property in business, you may lose these benefits. In practice, this does not happen often, but it is worth keeping in mind.

Also, do not forget to file Form 20-OPP – this is your notice to the tax authorities that you are renting out a 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 stop renting it, the form must also be updated.

Sublease for Group 2 sole proprietors: can you rent out leased premises?

We often see a myth online claiming that Group 2 sole proprietors cannot sublease rented premises. But that’s not true! The tax authority explained that Group 2 sole proprietors have full rights to sublease premises – both to simplified taxpayers and regular individuals – within the allowed area limits. At the same time, pay attention – according to Article 291.4 of the Tax Code, Group 1 and Group 2 sole proprietors cannot provide intermediary services involving purchase, sale, rental, or appraisal of real estate. Meaning, if you plan to be a realtor or intermediary – that is already for Group 3. 

Does a sole proprietor need a cash register when renting out premises?

The tax authority actively checks sole proprietors who receive rental payments in cash or by card. In such cases, a cash register (RRO/PRRO) is mandatory, and a fiscal receipt must be issued to the tenant. However, if money is received directly to the current account via IBAN (cashless), a cash register is not required. 

Can an individual rent out real estate?

In general, you have the right to rent out real estate even without sole proprietor status – simply as an individual. And the tax authority does not object to this. They emphasize: it is your choice – to work through a sole proprietor or without it. But note: if you have a sole proprietorship with KVED 68.20 that officially rents out property, you cannot simultaneously rent out real estate as an individual. You must first remove the KVED from your sole proprietorship.

What does this mean? If you rent out property as an individual, your rental income is not considered entrepreneurial income. The tax on this income is calculated under the rules for individuals: Personal Income Tax (PIT) – 18% and Military Tax – 5%. Importantly, in this case the tax agent is the tenant who withholds and transfers these taxes. If the tenant is an individual without entrepreneur status, the landlord independently declares income in the annual tax return. 

If rental has a systematic nature (many properties, stable income, large area), the tax authority may insist that this is already entrepreneurial activity and require registration as a sole proprietor. Therefore, if you plan to build a stable business on rental activity, it is safer to immediately register as a sole proprietor and operate as an entrepreneur.

And remember: taxation of rental income for individuals is significantly different from taxation for sole proprietors on the unified tax, where the rate is fixed or percentage-based and generally lower.

Can you rent out property partly as a sole proprietor and partly as an individual

When your rental business begins to grow and you want to scale – rent out more space while avoiding overpaying taxes – it’s important not to try to “split” your properties between a sole proprietor and an individual. The tax authority clearly prohibits this. If you try to rent some property as a sole proprietor and part as an individual, you may lose your unified tax status. Then you will have to rent everything only as an individual – and pay 18% income tax plus 5% military tax on the entire rental amount.

But there is another option if you are truly scaling your business. Part of the real estate can be rented out as a sole proprietor, and another part – already as a legal entity on the simplified taxation system. This is especially convenient under Group 3, because there are no area limitations, only an annual income limit.

If you rent everything as an individual, there are two scenarios. First – the tenant is another individual. Then you personally file an annual tax return and pay 18% income tax and 5% military tax. The second case – your tenant is a sole proprietor or a legal entity. Then they become your tax agents: they withhold and transfer taxes themselves, file report 4DF, and you receive the “net” amount in your account.

If you do not want to suddenly switch to the general taxation system and receive “surprises” from the tax office, do not experiment with different schemes of dividing property. It is better to consult an accountant and choose the optimal cooperation format from the very start of scaling.

Utility costs in rental: how a sole proprietor should handle them

And returning to sole proprietors, we remind you of the nuance with utility payments. Often, landlords provide tenants with electric generators and want to charge separately for electricity. But electricity is an excisable product, and this may lead to losing the simplified taxation status. The simplest and safest option is to include all utilities in the total rental price to avoid risks. And if you need details on what to write in the payment purpose, you can watch our video on the channel.

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Security deposit and rental

Finally, we remind you about another point – the security deposit. Tenants pay it to confirm their intentions. Tax authorities consider it as income of a sole proprietor at the moment of receiving it and do not allow reducing income if the deposit is returned. Therefore, it is better to state that the deposit, for example, will be used as payment for the last month of rent. 

And don’t fall for schemes with minimal symbolic rent – the tax authority has methodologies for minimum prices and during an audit will recalculate your income up to the minimum. So it’s better to state the real market value to avoid problems. 

Conclusion

Renting out real estate is a convenient tool for passive income, but only if properly handled legally and tax-wise.
Let’s summarize the key points:

• Group 1 sole proprietors cannot rent out property.
  
• Group 2 sole proprietors – only to individuals and simplified taxpayers (Groups 1–3).
  
• Group 3 sole proprietors and the general taxation system – can rent to anyone.
  
• KVED 68.20 is mandatory – otherwise, you cannot conduct rental activity as a sole proprietor.
  
• If renting as an individual – keep in mind the rates: 18% PIT + 5% military tax.
  
• Do not try to “split” properties between a sole proprietor and an individual – this risks losing the simplified taxation.
  
• Utility payments, security deposits, Form 20-OPP – all these details matter.
  

Rental is not only about square meters, it’s about proper planning and following tax rules. To avoid fines and troubles, it is better to consult a specialist once and sort everything out. Have questions? Ask us!