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Revenue from the sale of the leased asset to a third party - how to determine it?

Leasing is currently the most popular form of financing corporate purchases. Entrepreneurs choose it because of its simplicity and low cost of raising capital. In many cases, the leased asset is sold to a third party for various reasons. In this article, we present how to determine the income from the sale of the leased asset to a third party?

Lease agreement

A leasing contract is an agreement called in the Civil Code, as well as any other contract, even if it is not called a leasing contract, under which the financing party gives the user to use or receive benefits against payment under the conditions specified in the Act, depreciable fixed assets or intangible assets and legal, as well as land and the right of perpetual usufruct of land.

Operating lease within the meaning of tax laws will occur when:

the leasing contract must be concluded for a definite period of time equal to:

40% of the normative depreciation period for movables and intangible assets,
minimum 5 years for real estate,
any fixed period - when the user is a natural person who does not conduct business activity;

the sum of the fees specified in the leasing contract, less the due tax on goods and services, must correspond at least to the initial value of the fixed assets or intangible assets leased.

Financial leasing will occur when:

the leasing contract was concluded for a fixed period (in principle, any time);
the sum of the fees specified in the lease agreement, less the due tax on goods and services, must correspond at least to the initial value of the fixed assets or intangible assets leased.

In addition, the contract should contain a provision that in the basic period of the lease agreement:

depreciation write-offs are made by a user who is not a natural person who does not conduct business activity, or
the financing party resigns from making depreciation write-offs, and the user is a natural person who does not conduct business activity.

Changes to lease agreements

A leasing contract defined by tax regulations is essentially a leasing contract within the meaning of civil law, but only its specific elements, specified in the CIT Act or the PIT Act, are of key importance for generating tax effects. Other issues regulated in the Civil Code remain irrelevant.

In leasing contracts, we can therefore modify the payment schedule by, for example:

lowering the value of the lease installments due by extending the term of the contract;
shortening the duration of the lease agreement (limit of 40% of the normative depreciation period for operating lease), which will increase the value of the lease installments due;
suspension for a specified period of payment of installments;
reduction of installments for a specified period;
extension of the duration and reduction of the value of the due lease installments, with the simultaneous suspension for a specified period of installments and increasing / reducing the amount of lease installments after a given period (by the value of the principal part of lease installments unpaid for a given period).

In addition, the following may also be changed:

the way of using things, including the possibility of giving them for temporary use to a third party;
address data;
rules of incurring insurance costs for the leased asset;
rules for providing evidence of bearing burdens related to the possession of things by the user;
rules of charging the user with additional fees.

Importantly, modifications to the contract cannot change the operating lease into a finance lease or change a finance lease into an operating lease.

Modification of the lease agreement provisions related to the change of the parties to the agreement

The CIT and PIT Acts do not explain the concept of "other provisions of the contract". However, bearing in mind the literal wording of the provision, it should be assumed that this return refers to those provisions (contract terms) that determine the legal existence of a leasing contract for income tax purposes.

Let us remind you that a leasing contract defined by tax regulations is essentially a leasing contract within the meaning of civil law, but only its specific elements specified in the CIT Act or in the PIT Act are of key importance for generating tax effects.

This means that a change to "other contract provisions" is only such a change as a result of which the contract would no longer meet the conditions for being considered a lease contract for tax purposes.

Changing the parties to the lease agreement often results in changing other conditions that are significant from the civil point of view, such as:

established collaterals for the lease agreement;
address data of the party to the lease agreement;
the rules of charging the user with additional fees (apart from the fees that may arise during the duration of the leasing contract - this applies in particular to cases where the rights and obligations of the user will be entered into by an entity running a sole proprietorship).

Such modifications of the provisions of a lease agreement, which do not affect its classification as a lease agreement for tax purposes, are therefore not changes to "other provisions of the agreement".

Example 1.

The taxpayer signed a lease agreement for an excavator. As a result of the change in the business profile, it decided to assign the leasing to another taxpayer. What is the impact of such an agreement on tax settlements?

In this case, the accession to the leasing contract being performed during its term causes the new entity to enter into all the rights and obligations of the given party to the contract.

These are the rights and obligations arising from the content of the contract, which has not changed due to the assignment of the lease contract. Thus, it does not require its tax verification. In this case, the rights and obligations do not depend on which entity acts as a party to the contract, if it performs a lease contract that is unchanged in accordance with the requirements of civil law and tax law.

Revenue from the sale of the leased asset

In some cases, the financing party, for various reasons, is forced to transfer the ownership of the item (leased object). In the case of a new lessee, the entity that is a party to the previously concluded agreement changes.

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Thus, the buyer of the item enters the leasing relationship in place of the financing party. This effect results from the law itself and in fact means that the buyer becomes the subject of all rights and obligations of the financing party resulting from this legal relationship.

Taking into account the above issue to be resolved, it is correct to determine the amount of revenue in connection with the change of the financing party (transfer of the ownership of the leased object to the new financing party), i.e. whether it will be revenue from the sale of the leased asset in the amount equal to the value of the capital not paid by the user.

Pursuant to Art. 14 of the CIT Act, the income from the sale of property or property rights for consideration is, as a rule, their value expressed in the price specified in the contract. However, if the price, without justifiable reason, deviates significantly from the market value of these things or rights, this income is determined by the tax authority in the amount of the market value.

At the same time, it should be noted that determining the financing income at the value equal to the market price of the item only on the basis of the above regulation would lead to the risk of non-repayment by the user of the value of the leased asset, assuming the continuation of the existing lease agreement.

To sum up, in this case, the income of the financing party is the value expressed in the price specified in the contract, with the proviso that if the sale price is at the level of the capital not paid by the user, it should be assumed to be in line with the market value.