Operating lease - tax consequences

Service-Tax

Entrepreneurs may use things under different titles in their business activities. Operating leasing is very popular, it allows you to generate much greater costs than if the item was purchased for ownership and depreciated. However, not every lease can qualify as an operating lease. Read and check!

Operating lease - contract

The fees specified in the leasing contract, paid by the user in the basic period of the contract for the use of fixed assets and intangible assets, constitute the financing party's income and, respectively:

  • the contract must be concluded for a definite period of time, representing at least 40% the normative depreciation period, if its subject are movable or intangible assets subject to depreciation, or it must be concluded for a period of at least 10 years, if its subject is real estate subject to depreciation and

  • the sum of the fees set out therein, minus the VAT due, must correspond at least to the initial value of the fixed assets or intangible assets.

If the leasing contract specifies a price at which the user has the right to purchase the subject of the contract after the end of the basic period of this contract, this price is included in the total of leasing fees. The sum of fees does not include:

  • payments to the financing party for additional benefits, as long as they are separated from leasing fees;

  • taxes in which the financing obligation is imposed on the financing party due to the ownership or possession of fixed assets that are the subject of the lease agreement and insurance premiums for these fixed assets, if the leasing agreement stipulates that the user will bear the burden of these taxes and contributions regardless of the usage fee;

  • the deposit specified in the leasing agreement paid to the financing party by the user. This deposit is not included in the financing income and accordingly to the cost of obtaining income for the user.

Example 1.

The company has signed an operating lease agreement for the machine for 48 months. The monthly leasing installment is PLN 20,000. The company may charge this amount per month for the costs.

Extension of the lease agreement

After the end of the basic contract period, the parties may extend the contract. If, after the end of the basic period of the lease agreement, the lessor gives the user for further use fixed assets or intangible assets that are the subject of this contract, the lessor's income and, accordingly, the cost of obtaining the revenue of the user are the fees established by the parties to this contract.

Sale of the lessee's property upon termination of the contract

After the end of the basic period of the contract, the lessor may transfer the ownership of the goods to the lessee.

In this case, the financing income is the value of the sold item expressed in the price specified in the contract of sale. However, if this price is lower than the hypothetical net value, the revenue is determined at the market value. The cost of obtaining revenue in determining the income from sales is the actual net value.

This is the most common situation. In practice, the last leasing installment is a buyout. After paying for it, the current user (lessee) becomes the owner of the intangible asset. This means that he should comply with the provisions on depreciation, i.e. enter the acquired intangible asset into the register of fixed assets and intangible assets, determine its initial value and possibly depreciate. Possibly, because if the purchase price is lower than 3.5 thousand. PLN, instead of amortizing this amount, you can immediately post it to costs.

Example 2.

The company used a scooter. The redemption price was PLN 1,000. Due to its value, the company may:

  • include directly in the costs the price for which the scooter was bought, or

  • settle the expense over time through depreciation write-offs.

Operating lease 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 (if the parties so agree) to return to the user a part of the paid lease payments. The value of the reimbursed fees is for the user income in the amount of the actually received payment, and for the financing party, the tax cost is equal to the difference between the actual net value and the hypothetical net value.

Taxation of sales is carried out on general principles, i.e. sales revenue and the cost of obtaining it are determined.

Operating lease and early termination

It is worth adding that the lessee has the right to include as tax deductible costs the fees related to the early termination of the lease, if only the termination of the contract is justified by its economic interest. Such a position was presented in the letter of 29 January 2010 No.IPPB1 / 415-946 / 09-2 / MT Director of the Tax Chamber in Warsaw:

(...) the reason for the early termination of the leasing contract was the deterioration of the lessee's financial situation (no orders, low rates, high costs of transport activities). The applicant also noted that the concluded settlement resulted in a significant reduction in the amounts requested by the lessor in court proceedings due to premature termination of contracts. In connection with the above, the expense for fees related to the termination of the leasing contract may be recognized as tax deductible costs of non-agricultural business activity (...).

Operating lease and VAT deduction

Joke. 86 sec. 1 of the VAT Act shows that the taxpayer has the right to reduce the amount of tax due by the amount of input tax to the extent that the goods or services are used to perform taxable activities. When the amount of input VAT in the settlement period is higher than the amount of VAT due, the resulting surplus reduces the tax due for the next settlement periods or is returned to the bank account.

As a rule, the right to deduct input tax arises for the period in which (from a given activity) the tax obligation in output tax arose. 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.