Financial leasing - tax consequences

Service-Tax

Entrepreneurs use various types of assets in their business activities. In addition to the traditional acquisition of ownership, an alternative form of their use may be financial leasing. In order to qualify as a finance lease, the contract must meet certain criteria.

Financial leasing - contract

A characteristic feature of a financial leasing contract is the transfer to the user of the right to make depreciation write-offs on the leased object (and, of course, including them in tax costs). This means that the user may use all depreciation methods provided for a given fixed asset, as well as a one-time depreciation write-off.

In the case of financial leasing, the issue of the leasing installment components consists of two separate and differently treated elements, i.e .:

  • the capital part - i.e. the part of the fee that constitutes the repayment of the initial value of the leased asset (fixed assets or intangible assets). This part does not constitute the financing revenues and, accordingly, the beneficiary's tax-deductible costs. In other words - the capital part is tax neutral for the parties to the contract during its duration;

  • the interest part, which is the financing income and, accordingly, the tax cost of the user.

We deal with financial leasing when:

  1. the leasing contract was concluded for a definite period of time;

  2. the sum of the fees set out in the leasing contract, reduced by the due tax on goods and services, corresponds at least to the initial value of fixed assets or intangible assets, and in the case of the conclusion by the financing party of the next fixed asset leasing agreement or intangible asset previously subject to such a contract, corresponds at least to its market value as of the date of conclusion of the next lease agreement; provision of Art. 19 shall apply accordingly;

  3. the contract contains a provision that in the basic period of the lease agreement:

  1. depreciation write-offs are made by the user, if he is not the person mentioned in point (a). b, or

  2. the financing party resigns from making depreciation write-offs if the user is a natural person who does not conduct business activity.

If the amount of the repayment of the value of fixed assets or intangible assets per individual fees is not specified in the lease agreement, it is determined in proportion to the duration of this agreement.

In the case of financial leasing, the revenues of the financing party (lessor) and, respectively, the costs of the user (lessee) do not include fees in the part that constitutes the repayment of the initial value of fixed assets and intangible assets.

The financial lease agreement includes a clause transferring the ownership right to the beneficiary (lessee). After the end of the contract, he becomes the owner of the leased object.

It is worth adding that similar settlement rules apply to the purchase of a car under a credit or loan agreement.

Example 1.

The company has signed a finance lease agreement. Monthly, it will be able to include depreciation charges and the interest part of the leasing installment.

Termination of the financial lease agreement

After the end of the contract, the financing party may dispose of the leased object in one of the following three ways:

  • transfer the ownership of the item to the user, with the payment of the appropriate buyout price,

  • sell the leased item to a third party,

  • give the leased object to the user for further use, i.e. conclude another contract with him.

Financial leasing and contract extension

After the end of the basic contract period, the parties may extend it. If the financing party gives the beneficiary for further use fixed assets or intangible assets that are the subject of the contract, the financing party's income and, accordingly, the cost of obtaining revenues, are the fees agreed by the parties, also when they differ significantly from the market value.

Sale of the lessee's property after the end of the financial lease agreement

In the case of this transaction, sales revenue and tax deductible costs are determined in a different way than in the case of operating lease. For the financing party, the revenue from the sale of intangible assets may be equal to the price specified in the sales contract, also when it differs significantly from their market value. Thus, the legislator allowed the sale in this case for a price much lower than the hypothetical net value, even for a symbolic zloty. The cost of obtaining income from this sale will be the purchase price or production cost less the repayment of the initial value. The repayment of the initial value is equal to the value of the initial value of the intangible asset actually received by the financing party in leasing fees in the basic period of the leasing contract.

Financial leasing and the sale of an item to a third party

After the lapse of the basic period of the leasing contract, the financing party may sell the subject of the contract to a third party. He is then obliged to return to the user a part of the paid lease payments. The value of the fees returned is, for the user, income in the amount of the actual payment received, and for the financing party, the tax cost is also equal to the actual payment.

Determining the initial value of the purchased subject of financial lease

For users who are both natural and legal persons, the subject of financial leasing is a fixed asset and an intangible asset that are subject to depreciation regardless of the expected useful life. In addition, when making depreciation write-offs from the initial value of the subject of financial leasing, the same depreciation provisions apply as for own assets. The user should therefore determine the initial value of the leased asset.

Financial leasing and VAT deduction

The right to deduct input tax arises for the period in which (from a given activity) the tax obligation in output tax arose. In the case of a finance lease, this means that the right to deduct will arise in the period in which the leased asset was delivered. However, it should be remembered that the necessary condition for the reduction of output tax by input tax is the possession of an invoice. As it follows from Art. 86 sec. 10b of the VAT Act, the right to reduce the amount of tax due by the amount of input tax arises not earlier than in the settlement for the period in which the taxpayer received the invoice.

If the taxpayer fails to reduce the amount of tax due on the basic date, he may do so in the tax declaration for one of the next two tax periods.