The general requirements of lease contracts are provided by civil law, and lease is treated as so called ‘defined contract’. According to Polish tax regulations, tangible and intangible assets can be stated as equipment of a lease contract.
‘Operating lease contracts’ are concluded for a limited period representing at least 40% of the standard depreciation; the sum of lease payments established in the lease contract is not lower than the initial value of the lease object; at the end of a lease contract the market value of the leased asset cannot substantially differ from its residual value.
Operating lease in tax law
Operating lease pursuant to the tax acts (Personal Income Tax Act and Corporate Income Tax Act)
A lease agreement is concluded for a specified period of time equivalent to at least:
- 40% of normative amortisation / depreciation period, if the object of lease is a movable or intangible asset subject to amortisation / depreciation write-offs;
- 10 years, if the object of lease is real estate subject to depreciation write-offs;
- The sum of fees specified in the lease agreement, reduced by VAT, corresponds to at least the initial value of the object of lease.
- A total lease instalment (principal + interest) represents a deductible cost of the SSER and at the same time revenue of the financing party.
- Amortisation / depreciation write-offs are made by the financing party.
- The minimum final value for the user = hypothetical net value (initial value reduced by amortisation / depreciation write-offs calculated with the use of the digressive method taking into account amortisation / depreciation rate of 3).
Operating lease in accounting
Pursuant to the Accounting Act, an operating lease agreement is an agreement under which the SSER:
- does not classify the object of lease as its balance sheet asset;
- does not make depreciation write-offs;
- the entire lease instalment is charged towards current costs.
Also, if the lease agreement does not meet any of the following conditions:
- it transfers the ownership title to the object of the lease agreement to the user upon the lapse of its term;
- it contains the right to purchase the object of lease by the user upon the end of the period for which it was concluded, for a price lower than the market value as at the purchase day; here the purchase of the fixed asset by the user is meant;
- the period for which it was concluded is mainly equivalent to the anticipated useful life of the fixed asset or property right, with the reservation that it may not be shorter than 3/4 of such a period; the property right to the fixed asset may (but does not have to) be transferred to the user upon the lapse of the term of the agreement;
- the sum of fees, reduced by the discount, determined on the day of concluding the agreement and payable during the term of the agreement, exceeds 90% of the market value of the object of lease, as at the day of concluding the agreement: the sum of fees taken into consideration while verifying this condition, includes the final value of the object of the agreement that the user undertakes to pay on account of its purchase; however, fees payable to the user for additional performances, taxes and contributions towards insurance of the fixed asset are not taken into account, if the user covers them independently of the fees for usage;
- it contains a commitment of the financing party to conclude another agreement with the user, on transfer of the same object for payable use or to extend the current agreement on terms that are more advantageous from the terms provided for in the current agreement;
- it provides for the possibility of its termination, however with the reservation that all costs and losses incurred by the financing party on this account are borne by the user;
- the object of lease has been adjusted to the individual needs of the user; meeting this condition means that it is very likely that the fixed asset will be purchased by the user, even if this has not been expressly provided for in the agreement.
- The remaining transactions that meet any of the above conditions are pursuant to the Accounting Act finance Lease transactions and the object of lease is disclosed in the balance sheet of the user.
Comparison of individual types of lease transactions
|Operating (Tax) Lease||Off-Balance Sheet Operating Lease|
|(Legal) ownership of the object of lease||Financing Party||Financing Party|
|Right to make depreciation write-offs||Financing Party||Financing Party|
|Residual (final) value||Not lower than the hypothetical value||Market value|
|Term of agreement||Specified > 40% of the normative period of depreciation (movables) or > 10 years (real estate)||May not be shorter than ¾ of the useful life|
|Deductible costs||Total lease fee (principal + interest)||Total lease fee (principal + interest)|
|Total fees (VAT excluded)||Equal to at least the initial value of the object of lease||Total fees reduced by the discount on the day of concluding the agreement < 90% of the market value of the object of lease|
|VAT||VAT is charged and paid along with individual lease payments (according to the schedule) Tax rate: 22%||VAT is charged and paid along with individual lease payments (according to the schedule) Tax rate: 22%|
|Party disclosing in the balance sheet||User||Financing Party|
Operating lease in VAT law
Pursuant to the Tax on Goods and Services Act, the operating lease is treated as provision of services.
- VAT is added to each leasing payment upon its maturity;
- the tax rate amounts to 23%, regardless of the VAT rate applied upon the purchase of the object of lease.
For each leasing payment (own contribution, handling fee, lease instalment) a VAT invoice is issued.
VAT on passenger cars
When purchasing a passenger car, companies managing fleets are entitled to deduct the entire amount of VAT. Other companies may deduct only 60% of its value.
In the case of purchase of passenger cars by companies, pursuant to the Tax on Goods and Services Act (Article 86 Sec. 3) the input tax amounts to 60% of the amount of the tax stated in the invoice (…), however not more than 6,000.00 PLN.
This provision regulates instances in which the main object of the taxpayer’s activity consists in resale or transfer for payable use of cars (vehicles) under lease agreements. This means that when purchasing a passenger car, CFM companies have the right to deduct the entire amount of VAT. Other companies, which do not fulfil the aforementioned condition, are entitled to deduct VAT according to the principles set forth above upon vehicle purchase as well as its lease.
In the case of lease, 60% of the amount of tax charged on the lease instalment and other payments following from the agreement concluded is subject to settlement. The sum of deductions with regard to one car may not exceed the amount of 6,000.00 PLN.
If upon termination of the lease agreement the user decides to purchase the car previously used, then the user is entitled to a new VAT deduction limit. This results from the fact that the purchase/sales agreement is treated by tax authorities as an agreement separate from the lease agreement. In this case, the User is entitled to deduct VAT following from the invoice documenting the purchase in the amount of 60% of the tax charged, but not more than 6,000.00 PLN.
In the case of passenger cars whose value exceeds 20,000.00 EUR separate regulations concerning deductible costs apply.
During the term of the lease agreement depreciation write-offs (made by the financing party under operating lease and by the User under financial lease) may be credited towards deductible costs only in the part that does not exceed 20,000.00 EUR. Depreciation write-offs on partial value of a car exceeding an equivalent of 20,000.00 EUR may not be classified as such costs. In specific cases, other depreciation methods and the so-called individual depreciation rates may be applied. At the same time, a similar principle is applied in the case of insurance premiums. Insurance premium is a deductible cost only in the part not exceeding 20,000.00 EUR, while the remaining amount may not be classified as such cost.
Deduction of VAT on trucks
The principles governing deduction of VAT on trucks are the same as in the case of any other form of financing. The entire amount of VAT (100%) may be settled by lease companies as well as the lessee.
VAT Settlement: Comparison
|Transaction||Passenger car *||Trucks and vehicles fulfilling
the requirements of the Act **
|Vehicle purchase||60% (not more than 6,000.00 PLN)||100%|
|Lease fees||60% (not more than 6,000.00 PLN)||100%|
|Service costs ***||100%||100%|
|Other costs (tolls, washing, etc.)||100%||100%|
* Cars and other motor vehicles with the allowable total weight of less than 3.5 tons
** Cars with the allowable total weight of more than 3.5 tons and motor vehicles with the allowable total weight of less than 3.5 tons, but fulfilling the statutory requirements (Article 86 Sec. 4 of the Tax on Goods and Services Act), i.e. special-purpose vehicles, buses and vehicles whose construction demonstrates that they are adapted to carrying load
*** In case of rental, if the services described above are provided for in the agreement along with financing, there is a limitation with regard to VAT deduction applicable to the rent.
‘Financial lease contracts’ are concluded for a limited period; the sum of lease payments established in the lease contract is not lower than the initial value of the lease object; the parties agree that the user (lessee) makes the depreciation write-off.
The new ‘accounting regulations’ for leases in Poland, entered into force since 01.01.2002, are generally in line with US GAAP and IAS. Both, tangible and intangible assets, can be object of a lease contract under these accounting regulations.
If at least one of the following terms is applicable, the contract is treated as a ‘financial lease’:
- Ownership of the asset is transferred to the lessee at the end of the lease term;
- Upon the expiry of the lease contract the lessee has the right to purchase the asset at a lower price than its market value (counted using straight-line method);
- The lease contract is concluded for the period of time which covers or exceeds 75% of amortisation period of the asset (purchase option is not forbidden);
- The amount of discounted lease instalments less residual value of the asset exceeds 90% of costs of acquisition;
- Lessee has the right to renew the lease contract under the better conditions than the former one, keeping the same asset;
- Both parties have the right, to terminate the contract. Should the right be exercised, all costs, linked to the termination, must be covered by the lessee;
- The leased asset may be used only by the lessee because of its uniqueness and specificity.
Contracts which do not fulfil the aforementioned requirements will be treated with respect to accounting regulations as an ‘operating lease’.