Leasing is a popular and cost-effective form of financing a business. It allows to acquire necessary assets without tying up large amounts of capital upfront. Under leasing agreement the lessor (financer) undertakes to acquire a specified asset and lease it out for use to the lessee (user). The lessee pays compensation to the lessor in agreed installments. Depending on the type of leasing, ownership rights to the asset may or may not be transferred to the lessee.
There are two types of leasing in Poland: financial leasing and operating leasing, which are taxed under different rules.
1. Financial leasing
In the case of financial leasing, ownership rights to the leased object are transferred to the lessee. The lessee pays a one-time initial payment to the lessor, corresponding to a certain percentage of the purchase price of the leased object, while the remaining portion of the price, plus a predetermined commission, is divided into leasing installments paid by the lessee over a specified period of time. In the case of financial leasing, leasing installments resemble loan repayments and consist of two parts: (i) capital part (repayment of the purchase price of the leased object) and (ii) interest - remuneration (commission) for financing the investment by the lessor. Technically speaking, financial leasing is a concept similar to purchasing a fixed asset on installment terms (the lessee acquires ownership of the fixed asset and then repays specified installments to the financier).
Financial leasing and CIT/PIT
The 'capital' part of leasing payments (related to the price of the leased object) is included in tax-deductible costs through tax depreciation (that is depreciation charges constitute tax costs and not the capital part of leasing payments ).
It is different with the 'interest' part of leasing payments, which can be deducted as a tax-deductible cost on an ongoing basis (subject to certain limitations such as the debt financing limit - PLN 3 million or 30% of EBIDTA).
What’s important, in the case of passenger cars, there are the regulations limiting the depreciation (tax costs) to PLN 150,000 for regular/hybrid cars and PLN 225,000 for electric cars. Excess price beyond these limits is not tax-deductible.
Financial leasing and VAT
Upon the transfer of the leased object arises the obligation to pay VAT on the full value of the leased object. This means that the lessee is obliged to pay VAT upfront on the sum of leasing installments.
A business owner using the leased object in VAT-taxable economic activity is entitled to deduct input VAT. However, in the case of passenger cars used for both business and private purposes (mixed use), the lessee is entitled to deduct only 50% of the input tax. 100% VAT deduction is possible only if the car is used exclusively for business purposes, the entrepreneur maintains a mileage log for VAT purposes, the car is reported to the tax office on VAT-26 form, and there is a company car usage policy in place.
2. Operating leasing
In the case of operating leasing, ownership rights to the leased object are not transferred to the lessee. Throughout the lease term, the financier remains the owner of the leased object, while the lessee only has the right to use the leased object in exchange for compensation to the financier. Technically, operating leasing is similar to renting a fixed asset (the lessee only uses the fixed asset in exchange for a predetermined "rent" in the form of leasing installments). However, at the end of the lease, the lessee may choose to purchase the leased object. Ownership rights will only transfer to the lessee at the time of purchase.
Operating leasing - CIT/PIT
The lessee can deduct leasing payments as tax-deductible costs on an ongoing basis - both the capital and interest parts.
Regarding passenger cars, there are limits on the deductible amounts for tax purposes. For cars costing more than PLN 150,000, the lessee must exclude from tax-deductible expenses part of payments exceeding the costs counted with the proportion that amounts to the above limit in relation to the value of the car. For electric cars, this limit is PLN 225,000.
Operating leasing - VAT
The lessee pays VAT for each leasing payment separately (not upfront for the entire leasing payments).
When using the leased object in VAT-taxable economic activity, the lessee is entitled to deduct input VAT. Similarly to operating leasing, in the case of passenger cars with mixed use, the lessee is entitled to deduct only 50% of the input tax.
Car buyout from operating leasing
After the end of the operating lease agreement, a business owner can buy out the car for business purposes or personal use.
When purchasing the car for business use, the car can be classified as a fixed asset or the value of the car can be included in deductible expenses one-time, provided that the purchase price does not exceed PLN 10,000.
For private use purchases, it's important to take notice that selling the car within 6 years from the buyout (counting from the month following the month in which the car was purchased) is subject to PIT taxation.
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