Foreign fixed asset - what is it and how to account for it?
Most new entrepreneurs cannot afford to buy their own property for business purposes in the initial stages of their business activity. Therefore, they often decide to rent company premises. The question arises, how to tax the outlays on a foreign fixed asset?
Foreign fixed asset - definition
It should be emphasized that, irrespective of the expected period of use, also investments in third party fixed assets accepted for use are subject to depreciation. However, the Personal Income Tax Act does not contain a specific definition of a foreign fixed asset. Thus, it can be concluded that an investment in a foreign fixed asset should include expenses incurred for the improvement of a foreign asset, which is used by the entrepreneur on the basis of a signed rental, sublease, lease or other agreement of similar importance. This is referred to in Art. 22a of the PIT Act:
Art. 22a 1. Subject to Art. 22 c, owned or jointly owned by the taxpayer, acquired or manufactured on its own, complete and fit for use on the date of acceptance for use:
1) structures, buildings and premises owned separately,
2) machines, devices and means of transport,
3) other items
- with an expected period of use longer than one year, used by the taxpayer for the purposes related to his business activity or put into use on the basis of a rental or lease agreement or an agreement referred to in art. 23A, paragraph 1, called fixed assets.
2. They are also subject to depreciation, subject to Art. 22 c, regardless of the expected period of use, adopted for use investments in foreign fixed assets, hereinafter referred to as "investments in foreign fixed assets".
Outlays on a foreign fixed asset - renovation or modernization?
First, an entrepreneur who incurs a third party fixed asset used, for example, on the basis of a lease agreement, should determine whether the works performed are renovation works or will increase its initial value.
As is clear from the explanations of the Minister of Finance (ref. PO 3 / 722-160 / 94), expenditure on the improvement of fixed assets includes expenditure on:
reconstruction, i.e. change (improvement) of the existing state of fixed assets to another,
expansion, i.e. enlargement (extension) of property components, in particular buildings and structures, technological lines, etc.,
reconstruction, i.e. restoration (rebuilding) of fully or partially used assets,
adaptation, i.e. adapting (processing) an asset for use for a purpose other than its original purpose or giving this asset new functional features,
modernization, i.e. modernization of fixed assets.
Tax regulations do not regulate the concept of renovation, but in this matter you can use the provisions of the Construction Law Act. Pursuant to Art. 3 point 8 of the Act, renovation shall be understood as the performance of construction works in the existing building object consisting in the restoration of the original condition, and not constituting current maintenance, while the use of construction products other than those used in the original condition is allowed.
In addition, as indicated by the individual interpretation of the Director of the Tax Chamber in Warsaw of October 16, 2012 (ref. IPPB5 / 423-641 / 12-3 / RS), the difference between expenditure on renovation and expenditure on improving fixed assets is therefore that renovation aims to maintain, restore the value in use of a fixed asset and is a type of repair, replacement of worn-out elements, while as a result of improvement the fixed asset is modernized or adapted to perform other, new functions, it gains a significant change in functional features.
Foreign fixed asset - what rate of depreciation?
It should be emphasized that with regard to investments in a foreign fixed asset, the provisions of the PIT Act provided for special rules for determining the depreciation rate. Importantly, the depreciation method should be established over the entire depreciation period. Pursuant to Art. 22j, taxpayers may individually determine the depreciation rates for investments in foreign fixed assets adopted for use, except that for:
1) investments in foreign buildings (premises) or structures - the depreciation period cannot be shorter than 10 years,
2) fixed assets included in groups 3-6 and 8 of the Classification:
24 months - when their initial value does not exceed PLN 25,000,
36 months - when their initial value is higher than PLN 25,000 and does not exceed PLN 50,000,
60 months - in other cases;
3) for means of transport, including passenger cars - 30 months.
Entrepreneur X incurred expenditure to adapt the hall rented to production purposes in the amount of PLN 50,000. With a minimum depreciation period of 10 years for buildings, the individual depreciation rate is 10 years. Therefore, the annual depreciation charge will be PLN 5,000 (PLN 50,000 * 10%).
It is the maximum depreciation rate determined individually for investments in foreign fixed assets.
A foreign fixed asset with a value below PLN 3,500
If the total value of the investment for a foreign fixed asset does not exceed PLN 3,500, then the entrepreneur has two options to settle the costs:
expenses will be included directly in tax deductible costs due to the low value of the investment or
expenditures are included in costs through a one-off depreciation write-off.
If the expenses incurred were included directly in tax costs due to not exceeding PLN 3,500, and during the tax year it turns out that the total amount is above PLN 3,500, the entrepreneur will be obliged to adjust the costs by the expenses previously included in them, and then enter them into fixed assets of activity and subject to depreciation.
To sum up, the settlement of expenditure on a foreign fixed asset depends on how the investment expenditure will be classified by the entrepreneur. Because expenses related to ordinary renovation may be included directly in tax costs, while the method of settling the modernization of the fixed asset will depend on the final value of expenditure incurred during the tax year.