In their everyday work entrepreneurs deal with two kinds of leasing: operational and financial. These two definitions also result from the tax regulations. Choosing the form exclusively depends on the deicsion of the taxpayer, predicated on the tax and legal environment he is operating in, and his business profile.
The Operational Leasing
With this form of the contract the subject of the underlying leasing is recognised as an asset of the lessor party (for instance, a leasing company). Thus, it is the leasing party who is obliged to take the depreciation and amortisation expenses. However, the agreed leasing installments constitute the tax deductible expenses on the side of the lessee; VAT and any initial charge are added to these instalments. The balance of the instalments set in the contract reduced by the due VAT has to correspond to at least the initial value of the underlying leased out tangible fixed assets. Following the expiration of the lease, the lessee stays entitled to purchase the subject of the lease from the lessor as stipulated in the source contract.
The Financial Leasing
Choosing this kind of the lease contract the taxpayer has to know that the subject of the contract is to be recognised as the asset of the Leaseholder; thus, unlike the operational leasing, it is the leaseholder who is obliged to make the depreciation and amortisation expenses. Additionally, the lessee may only recognise the interest part of the leasing instalment as his tax deductible expenses. VAT shall be paid in full in advance together with the first instalment, immediately after commissioning the subject of the contract. It is worth mentioning, that the lessee becomes the owner of the subject of the lease automatically after the last instalment has been duly paid.
|The Operational Leasing||The Financial Leasing|
|Depreciation and amortisation||Duty of the lessor||Duty of the lessee|
|Term||Longer than 40% of the depreciation and amortisation time of the subject (real property - at least 10 years)||Over 12 months|
|Tax deductible expenses||The lessee recognises the net instalments and the initial charge as the expenses||The lessee recognises the interest part of the leasing instalments and the depreciation and amortisation as expenses|
|VAT||Added to the leasing instalments||Paid in advance together with the first instalment|
|Redemption/repurchase||Depending on the depreciation and amortisation rate and the redemption term||After paying the last instalment the subject becomes the ownership of the lessee|
The main advantages of financing any asset purchase via leasing when compared to involvement of own equity or utilisation of bank loans:
- its‘ relatively easy access in Poland and the fact that even start-up companies can draw on leasing financing
- leasing companies do not require any corporate history when talking to new clients which is not the case with banks which normally require a history of 2 years of existence of the applicant supported by two closed financial accounting years
- all incurred financing costs are tax deductible whatever leasing option chosen.
The majority of contracts concluded on the Polish market are the operational lease contracts; reasoned by the fact that in case of the financial leasing VAT has to be paid in full in advance which is a drain on company‘s liquidity.
Choosing the operational leasing is also recommended in case the planned term of exploitation of the leasing subject stays short-term orientated. In such a case the monthly lease installments will be very high reducing the taxable income and thus the tax base used for the monthly prepayments on corporate income tax to the Polish Inland Revenue Office.