Building leasing - how should it be taxed?
Leasing is currently one of the most common contracts concluded between entrepreneurs. Due to the fact that no provision limits the scope of the lease agreement, it may also apply to real estate. Tax laws define the principles of leasing taxation in a special way. This specificity also includes building leasing.
What is the leasing contract?
The leasing contract has been comprehensively described in the Civil Code (Articles 7091-70918). The wording of these provisions indicates that through the leasing contract, the financing party undertakes, in the scope of the activities of his enterprise, to purchase the item from the designated vendor on the terms specified in this contract and give the user to use or use and receive benefits for a specified period of time, and the user undertakes to pay the financing party in the agreed terms in installments, cash remuneration, at least equal to the price or remuneration for the purchase of goods by the financing party.
Separate principles of land leasing taxation and building leasing
Differences in land lease taxation result from the fact that, according to tax laws, land is fixed assets that are not subject to depreciation. In the field of corporate income tax, land leasing is described in Art. 17g-17i. Pursuant to these provisions, if the contract was concluded for a specified period of time and the sum of the fees set in it corresponds to at least the value of the land, the fees paid by the user in the basic period of the contract to the extent that they constitute the repayment of the land value, do not constitute tax deductible costs for the user. As a result, they are also not included in the financing income.
Only the so-called the interest portion of the lease payment that does not constitute repayment of the land value. This is confirmed by the Director of the Tax Chamber in Poznań in the individual ruling of July 24, 2013, no. ILPB4 / 423-145 / 13-3 / DS:
Therefore, if the subject of the lease agreement concluded for a specified period of time is land, and the sum of the agreed fees corresponds at least to the value of the land equal to the expenses incurred by the financing party for its purchase - the costs of the user (Company A) do not include the leasing fees incurred by the user (Company A ) in the part constituting the repayment of the value of this land. Thus, tax deductible costs include the so-called the interest part of the leasing fee, i.e. the interest included in the leasing installment, in accordance with the schedule for the leasing agreement.
The issue related to the moment of deducting the deductible costs of interest income is regulated in Art. 16 sec. 1 point 11 of this Act, according to which the accrued, but unpaid or redeemed, interest on liabilities, including loans (credits), is not considered to be tax deductible costs.
In view of the above - as a rule - interest on liabilities, including loans (credits), is classified as tax deductible costs on the date of their payment.
To sum up, the part of the lease installment relating to the land, not constituting the repayment amount of the fixed assets, regardless of the intended use of the leased asset by Company A in its business activities, should be included by the Applicant as tax deductible costs on the date of payment, taking into account its share in the Company's profits AND.
Unusual situations may arise when the land is built-up with a building, therefore the leasing of the building will refer to the general principles (operating or financial leasing). As a result, it is possible that two separate agreements will be concluded - one for the lease of land, the other for the lease of a building built on that land. This case was analyzed by the Director of the Tax Chamber in Poznań on July 24, 2013, no. ILPB4 / 423-145 / 13-2 / DS, where we read:
In the opinion of the Company, doubts should not arise from the fact of concluding a lease agreement for a building and land in one Agreement. The contracting parties will clearly identify the subject matter of each lease separately. The leasing fee will also be divided into the part related to the building and a separate part related to the land (lease installment in the part related to the building and lease installment in the part related to the land).
As a consequence, the entire leasing installment relating to the building should be tax-deductible in the month in which the corresponding revenues were achieved, and in the case of land installments, the tax deductible cost will be, respectively, the part of the leasing fee not constituting the repayment of the initial value of the fixed asset, in accordance with the detailed provisions of the installment schedule. leasing.
Purchase of the leased object
After the expiry of the lease agreement, the land may be bought. The financing party may transfer to the user the ownership of the land which is the subject of this contract. In this case, the price specified in the sales contract is considered the cost of the lessee and the income of the financing party. Importantly, in accordance with Art. 17g of the CIT Act, this price may differ significantly from the market value.
The provision indicated in the previous paragraph also refers to the costs of obtaining revenues of the financing party. The financing party who leased the land may include as costs the expenses for the purchase of the land less the repayment of the initial value (the sum of the lease payments received by the financing party). As a consequence, the analysis of the presented provision leads to the conclusion that if the user repays the initial value of the fixed asset through leasing fees, the financing party will not have any tax deductible costs due to the transfer of land ownership to the user.
The entrepreneur purchased land worth PLN 700,000. Then, he signed a land lease agreement with a contractor. The monthly lease fee was set at PLN 10,000, and the contract itself was signed for a period of 5 years. After the end of the contract, the financing party sold the land to the user for PLN 1,000,000. This price is entirely the cost of the user. The financing party's income is PLN 1,000,000, while the tax deductible cost is PLN 100,000 (700 - (10,000 x 12 x 5)). As a result, the financing income from the sale of land amounts to PLN 900,000 (1,000,000 - 100,000).