Leasing of photovoltaic panels on the building - VAT settlement

Service-Tax

In Poland, the production of electricity from photovoltaic panels is playing an increasingly important role. Not only private individuals but also entrepreneurs invest in photovoltaic panels. They usually have a larger installation as the power requirement is also higher. Thus, the purchase of the installation is usually financed with external funds. In practice, it is most often a bank loan or leasing of photovoltaic panels.

Leasing - definition

Due to its flexibility, leasing is an attractive and convenient form of financing the purchase of fixed assets, which is used by many entrepreneurs. It is also a good alternative for companies that have not been able to obtain a bank loan.

The definition of leasing can be found in the Civil Code (see Art. 709 of the Civil Code). According to it, in the scope of the leasing contract, the financing party undertakes to purchase the item from the designated vendor in the scope of the activity of his enterprise under the conditions specified in this contract and give this item to the user to use or use and receive benefits for a specified period of time, and the lessee undertakes to pay the financing party in the agreed installments cash remuneration at least equal to the price or remuneration for the acquisition of goods by the financing party.

Accounting and tax leasing is divided into:

  • operating;

  • financial.

Each of the above forms of leasing has separate tax effects, both in terms of income tax and VAT.

In practice, entrepreneurs use operating leasing more often. It is a lease under which the financing party makes depreciation charges on the basis of income tax. It is treated as the provision of services within the meaning of the VAT Act. In such a situation, the subsequent monthly leasing installments are charged with VAT. Therefore, the expenses related to VAT will be spread over time. The user will not have to incur the VAT-related expense at the beginning of the leasing contract.

Importantly, the leasing contract boils down to using things and collecting benefits, but does not give rise to the right to dispose of the goods as the owner.

After the end of the basic lease term, one of the options is to sell the subject of the lease to the lessee. The option to buy the leased item is an entitlement that the lessee may use, but does not have to.

In the case of financial leasing, the lessee treats, for example, the leased machine as a fixed asset and, after entering it in the records, settles its purchase in the form of depreciation write-offs. Financial leasing usually lasts for the entire economic useful life of the asset. After its completion, its item becomes the property of the lessee.

Currently, leaseback is more and more popular among entrepreneurs.

In practice, it consists in the fact that the entrepreneur, in order to optimize the financial situation, sells the property he purchases while ensuring himself the right to use it in exchange for appropriate fees. This form of leasing enables the release of funds invested in leasing.

Right to deduct input tax

The basic principles of deducting input tax have been formulated in Art. 86 sec. 1 of the VAT Act. Pursuant to this provision, to the extent that the goods and services are used to perform taxable activities, the taxpayer referred to in art. 15 of the Act, has the right to reduce the amount of tax due by the amount of input tax.

The amount of the input tax is the sum of the tax amounts resulting from the invoices received by the taxpayer for:

  • purchase of goods and services,

  • make all or part of the payment before purchasing the goods or providing the service.

It follows from the above that the right to reduce the amount of tax due by the amount of input tax is granted when certain conditions are met, i.e. the deduction is made by a registered, active VAT taxpayer, and when the goods and services for which the tax was acquired input, are used to perform taxable activities, i.e. those which result in the determination of the tax due (creation of a tax liability).

Therefore, the above rule excludes the possibility of reducing the amount of tax due by the amount of input tax related to goods and services that are not used for taxable activities, i.e. in the case of their use for activities exempt from VAT and not subject to this tax.

Example 1.

The taxpayer purchased an apartment in a new apartment building. He planned to set up an office in it. However, after the purchase, he decided that the location was not suitable and decided that the apartment would be rented for residential purposes. Thus, it will be used for activities exempt from VAT. The taxpayer received an invoice for the purchase of an apartment with a rate of 8%. Can he deduct tax from this invoice?

In this case, the taxpayer is not entitled to deduct the input tax from the invoice. The purchase of an apartment is associated with exempted activities.

Leasing of photovoltaic panels in a commercial and residential building

In many cases, the buildings in which we conduct business are also residential buildings.

Example 2.

The taxpayer purchased a service and residential building. His carpentry workshop is located on the ground floor. The rest of the building is used for residential purposes. The taxpayer is an active VAT payer. In July, he purchased a photovoltaic installation that was installed on the above-mentioned building. The contractor issued a VAT invoice for the photovoltaic installation. In this case, can the taxpayer deduct VAT from this invoice?

As is clear from the above analysis of the provisions, the settlement of the input tax on the principles set out in Art. 86 of the VAT Act is conditional on the goods and services purchased by the taxpayer being used by him to perform taxable activities.

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Pursuant to the provision of Art. 86 sec. 7b of the Act in the case of expenditure incurred on the acquisition, including the acquisition of perpetual usufruct rights to land, and the production of real estate constituting the property of the taxpayer's enterprise, used both for the purposes of the taxpayer's business and for other purposes, in particular for the purposes of personal taxpayer or its employees, including former employees who cannot be fully attributed to business activities, input tax is calculated on the basis of the percentage in which the property is used for business purposes.

The above regulation introduces a special method of calculating the input tax on the purchase or production of real estate, including the expenditure incurred, in a situation where a given real estate is to be used both for business purposes and for purposes not related to the conducted activity.

Thus, in our case, since the expenditure on the photovoltaic installation is incurred on a building that serves both business and personal purposes, we can deduct VAT proportionally.

Therefore, it is necessary to determine the percentage in which a given property is used for the purposes of the taxpayer's business activity and in this proportion to deduct the input tax from the invoice documenting the purchase of photovoltaic panels.

In summary, a taxpayer who installs a residential and service building may deduct VAT from the purchase. In this case, however, we usually have to make a proportional deduction.