Taxation of the parties to the leasing agreement, part III

Leasing contracts also involve issues regarding the change of parties to the contract, re-leasing or redemption of its subject. The listed events may trigger specific tax consequences. Therefore, both lessors and lessees should review the basics.

Assignment of a leasing contract

The provisions on leasing contracts allow the parties to the contracts to be changed. The assignment of a leasing contract, if it does not provide for other changes in the contract, apart from those relating to the parties, does not affect the basic duration of the contract. It results directly from the act on personal income tax, Art. 23a point 2 (art.17a point 2 updop):

“Whenever the chapter refers to (...) the basic period of the lease agreement - it shall mean the specified period for which the agreement was concluded, excluding the time for which it may be extended or shortened; in the event of a change of the party or parties to this contract, the basic period of the contract is deemed to be retained, unless other provisions of the contract have changed (...) ”.   

However, these rules apply only to contracts concluded after January 1, 2013. In relation to previous contracts, the provisions of the legal status in force at the date of signing these contracts shall apply, and these did not provide for the possibility of changing the user during the term of the lease contract.

Leasing again

From January 2013, the regulations also refined the issue of re-leasing. The changes made it more profitable than it was before. As Art. 23b paragraph. 1 point 3:

"(...) the sum of the agreed fees in the leasing contract (...) less 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 the intangible asset previously subject to such a contract corresponds at least to its market value on the date of the next leasing contract (...) “. This means that in the current legal situation, the sum of the fees specified in the contract should at least correspond to the market value of the leased asset on the date of the next lease agreement, and not, as it was so far, the initial value of this component.

Significant: for this principle it does not matter whether the contract is concluded with the previous user or with a completely new entity. However, it should be borne in mind that the re-leasing on the current terms also applies only to contracts concluded after January 1, 2013.

Buy-out from leasing on the example of cars

Usually, the lessor allows the car to be bought out at the end of the operating lease. This issue does not apply to financial leasing. There, from the very beginning, the subject of the contract is owned by the lessee. The end of the financial leasing contract means the end of paying the leasing installments, i.e. the expiry of the liability. On the other hand, in an operating lease (unless the contract provides otherwise), after the end of the contract period, the car is still owned by the lessor, who usually presents an additional purchase offer. In the case of natural persons, the car may be leased in two ways:

1) buyout for a company,
2) private buyout.

The tax settlement of the transaction will depend on the buy-out method.

Buy out on a company

If, after the expiry of the leasing period, the subject of the contract is purchased for the company, the entrepreneur may:

• qualify it as a fixed asset;
• the buyout value should be included directly in the costs - provided that the buyout price does not exceed PLN 3,500.

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When the purchased car meets the criteria set out in Art. 22a (1) updof (Article 16a (1) updop, respectively), may be entered into the register of fixed assets. This will take place in the month that it is put into service (usually the same month that the redemption took place). As the initial value of the purchased goods, the standard amount due to the seller should be taken:

• increased by the costs related to the purchase accrued until the date of commissioning the fixed asset for use, and
• less deductible input VAT, and
• adjusted for possible exchange rate differences.

After qualifying the purchased item to fixed assets, the taxpayer should define the depreciation plan. If the determined initial value does not exceed PLN 3,500, the taxpayer may depreciate once in the month of entering the purchased item into the register. Then, if the introduction to fixed assets took place in the month of buyout in the same month, the entire value will go to tax deductible costs.

However, if the value exceeds the indicated limit, a depreciation plan should be prepared according to the selected depreciation method for a fixed asset, starting to include depreciation write-offs from the month following the acceptance of the item for use in the company.

Private buyout

A natural person running a sole proprietorship may purchase a car previously used in the company, under an operating lease, for private use. However, when deciding on such a solution, certain tax consequences should be taken into account.

First, in such a situation, the entrepreneur will not count the redemption expenses as corporate tax deductible expenses.

Secondly, if the car purchased from the lease is to be used for private and corporate purposes, it will be necessary to keep records of the vehicle's mileage. Expenses related to the current use of the vehicle for business purposes will be a tax expense, but only up to the limit of kilometers (mileage records).

Thirdly: the use of a car purchased from (company) leasing only for private purposes may result in disputes with tax offices. Let us remember: the tax authorities then take the position that the possible sale of such a car will be treated as a company sale. This means that if the entrepreneur decides to sell the car within 6 years from the purchase of the car, despite the purchase for private purposes, he would be obliged to treat and tax it as income from business activity. According to the tax authorities, it is justified, because before the buyout, individual leasing installments were included in the tax costs of the business, and the preferential buyout is a consequence of the earlier leasing contract, although it is a completely separate economic event in terms of trade.

An example for the above position is the individual interpretation issued on January 10, 2013 by the Director of the Tax Chamber in Łódź, No.IPTPB1 / 415-603 / 12-4 / AG:

“It should be noted here that a car used in business operations under a leasing contract is an asset of the business activity already due to the fact that tax deductible costs are charged, eg with leasing installments or expenses incurred for its operation. Moreover, it should be borne in mind here that the possibility of its preferential purchase is usually provided for the entity being the lessee, i.e. a natural person conducting business activity.This means that also the possibility of purchasing this car on preferential terms is related to the conducted activity, it is a consequence of the leasing agreement concluded as part of the conducted business activity. "

For the lessor, placing the leased object for purchase is also a separate economic event, not directly related to the tax agreement with the lease agreement itself.