Fee for early termination of the lease agreement
An operating lease agreement is a popular form of using fixed assets in the company. It happens that entrepreneurs shorten it for economic reasons, which is most often associated with paying a fee. The question then arises whether the fee for early termination of a passenger car lease agreement should be a tax deductible cost?
Conditions for classifying the contract as operating lease
Pursuant to Art. 23b of the PIT Act, the fees set out in the leasing contract, incurred by the user in the basic period of the contract for the use of fixed assets and intangible assets, constitute the financing income and, respectively, the cost of obtaining income for the user if:
the leasing contract, if the user is not the person mentioned in point 2, was concluded for a definite period of time constituting at least 40% of the normative depreciation period, if the subject of the leasing contract are movable or intangible assets subject to depreciation write-offs, or was concluded for a period of at least 5 years, if its subject is subject to depreciation write-offs of real estate;
the leasing contract, if the user is a natural person who does not conduct business activity, was concluded for a specified period of time;
the sum of the agreed fees in the leasing contract referred to in point 1 or 2, 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 event of the conclusion by the financing party of the next fixed asset lease agreement or value intangible and legal entities previously subject to such an agreement corresponds to at least its market value on the day of concluding the next lease agreement; provision of Art. 19 shall apply mutatis mutandis.
The regulations do not include the exclusion of the possibility of including the fee for early termination of the lease agreement as costs. Therefore, when qualifying the early termination fee, reference should be made to the general definition of costs. According to it, tax costs may be only those expenses that affect the achievement of income or the preservation or protection of the source of income. Moreover, the expense cannot be included in the catalog of expenses that cannot be classified as tax deductible costs.
In our opinion, the fee for early termination of the leasing contract meets the above conditions, as such an expense is generally incurred to protect the interests of the entrepreneur, because by not paying the fee, the entrepreneur would risk the process.
It is also related to the overall business activity, conditioning the possibility of further functioning and earning revenues.
Early termination of the leasing contract and the fees already paid
The fact that the lease contract was terminated before the expiry of the basic contract period does not mean that the payments made so far should be considered as expenses that do not constitute tax deductible expenses. Such an effect of terminating the contract is not provided for in the Personal Income Tax Act.
In connection with the above, it should be considered that despite the early termination of the contract, the leasing fees incurred by the taxpayer remain tax-deductible, provided that the relationship between their incurring and obtaining income is demonstrated. There is no need to adjust costs for previous periods.
However, as indicated by the interpretations of tax authorities, it is not always possible to include the fee as costs.
Early termination of the contract for the purpose of reselling its subject
Undoubtedly, when the decision to terminate the contract was taken in order to sell the leased asset, the payment of the fee is related to the achievement of income, because the taxpayer will generate income as a result of the sale of the leased asset.
Therefore, it should be considered that the fee for the remaining period of the lease contract paid in connection with the early termination of the lease contract, in the case of buying a car for resale to another entity, is an expenditure incurred in order to obtain income. This position was also confirmed by the Head of the First Tax Office in Radom in a letter of June 1, 2007, No. 1424/2140/4111/423/2/07, which reads:
(…) The repayment of all leasing installments is necessary for the car to be bought back, and therefore for the planned sale of the car. Therefore, the leasing fees paid for the remaining period of the leasing contract paid in connection with the early termination of the leasing contract, in the case of buying the car for resale to another entity, are an expenditure incurred in order to obtain income (there is a direct relationship with the income generated from the sale of the car), and therefore may be classified as tax deductible costs (...).
Fee for early termination of the leasing contract for economic reasons
In our opinion, the fee for early termination of the lease agreement may be classified by the lessee as tax deductible costs, if only the lessee's economic interest is in favor of terminating the agreement.
This position is also confirmed by the tax authorities, an example of which is the letter of January 29, 2010 of the Director of the Tax Chamber in Warsaw, No.IPPB1 / 415-946 / 09-2 / MT, where we can read:
(...) 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 (...).
However, there is also an unfavorable interpretation, an example is the interpretation of the Director of the National Tax Information of August 10, 2017, in which we can read:
(...) Here. The authority does not question the economic sense of the expense incurred or the rationality of economic decisions made by the entrepreneur and their effectiveness, but assesses whether a specific expense was incurred in order to achieve income (preserving or securing its source).
To sum up, it should be stated that in the case at hand, the fee for shortening the term of the operating lease agreement will not be able to constitute a tax deductible cost of the business activity conducted by the Applicant, because, as indicated above, it will not be incurred in order to generate income or to preserve or secure the source of income. , pursuant to Art. 15 sec. 1 updop.
In the light of the above, the position of the Applicant should be considered incorrect (...).
In our opinion, this position is incorrect.