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LEASING BUSINESS IN POLAND - LEGAL & TAX ISSUES

LEGAL BACKGROUND

Leasing agreement is an agreement which is regulated separately by the Polish Civil Code.

Generally, in view of these provisions, leasing is an agreement under which a lessor undertakes to purchase an asset from a given seller and release it to the lessee for use. Under such agreement the lessee undertakes to pay the lessor a financial consideration in agreed installments, at least amounting to the price or consideration borne by the lessor for the purchase of the asset. Despite the above definition, the asset subject to the lease agreement does not necessarily have to be purchased by the lessor specifically for the purposes of the given lease agreement. It may also be the asset owned by the lessor.

The lease contract is deemed invalid if it is not concluded in writing. Through the duration of the contract, the lessor remains legal owner of the asset.

The provisions of Polish Law do not provide for any particular requirement regarding the legal form of the leasing activity. In practice the leasing companies act as Limited Liability Company or a Joint Stock Company.

TAX PROVISIONS

Corporate Profit Tax [CIT]

In line with the general definition envisaged in the CIT Act, lease agreement is an agreement referred to in the Civil Code, as well as any other agreement, under which a lessor gives to the lessee for use against a consideration or for deriving benefits depreciable fixed or intangible assets as well as land.

The above definition does not cover the perpetual usufruct rights, which gave rise to the standpoint expressed by the Ministry of Finance that such rights cannot be subject to the lease agreement.

The provisions of Polish tax law do not explicitly refer to such terms as operating and financial lease; however in practice these terms are commonly used.

Operating leasing

In order to treat the agreement as an operating lease, the following conditions have to be met: a) the leasing agreement has been concluded for definitive period of time, constituting at least 40% of the normative depreciation period (the period in which tax depreciation write-offs become equal to the initial value of the fixed asset), if it concerns movables or intangible assets, or has been concluded for a period of at least 10 years, in the case of real property; and b) the total of payments (less VAT), corresponds to at least the initial value of the assets.

In the case of operating leasing, lease payments paid by lessee during primary lease period (i.e. definite period of time for which the lease agreement has been concluded, excluding the time by which it may be extended or reduced) constitute income of the lessor and, respectively, tax deductible costs for the lessee. Depreciation deductions for tax purposes are, in this case, made by the lessor.

Transfer of ownership After the primary lease period has elapsed, the lessor is entitled to sell the assets in question for a price lower than the market value of the asset. However, such price cannot be lower than the so-called net hypothetical value (i.e. initial value of the assets less depreciation write-offs calculated under the diminishing balance method and the standard depreciation rates multiplied by the co-efficient 3). Otherwise the lessor's income may be determined at market value. 1.2 Financial leasing

In order for an agreement to be qualified as financial leasing, the following conditions have to be met: a) the lease agreement has been concluded for a definite period of time; b) the total of payments (less VAT) corresponds to at least the initial value of the assets; c) the agreement provides that during the primary lease period, depreciation write-offs are to be made by the lessee.

Part of the payments received by the lessor that correspond to the initial value of the assets does not constitute taxable revenue for the lessor and, respectively, lessee's tax deductible costs. The lessee is entitled to make the depreciation write-offs for tax purposes.

Transfer of ownership If the lessor transfers the ownership of the leased assets to the lessee after the primary lease period, the price may be established at the level lower than the market value of the assets. As a rule, expenses incurred by the lessor for acquiring or manufacturing leased assets are not treated as tax deductible costs. However, if the assets in question are sold after the primary lease period, such expenses decreased by the repayment of the initial value of assets constitute tax deductible costs.

If the lease agreements do not meet the conditions allowing for their classification as either operating or financial lease, relevant provisions on taxation of tenancy and rent agreements apply.

Special rules for passenger cars

If the value of the purchased passenger car exceeds EUR 20,000, the depreciation write-offs of such car are not fully deductible for the lessor. The deductible part is restricted to the portion of the cost up to EUR 20,000.

The same rule applies to costs of non-compulsory insurance of the passenger cars of the value exceeding EUR 20,000. They can be treated as tax deductible costs only up to a limit being the insurance costs of the car up to the value of EUR 20,000.

VAT regulations

In line with the VAT provisions, the lease agreement may be classified as either supply of goods or supply of services. Proper classification of the lease agreement has a crucial impact on the VAT implications of such agreement.

Leasing as supply of goods

The Polish VAT provisions treat as a supply of goods the release of goods under the lease contract that satisfies the following conditions:

- is qualified as financial lease under the CIT provisions (i.e. depreciation write-offs are made by the lessee) and - provides that in the normal course of events envisaged in the contract or at the latest upon payment of the final installment, ownership shall pass to the lessee. In this respect, the construction of Polish provisions is slightly different than the respective provisions of the VI EU Directive. As a result, the scope of the lease agreements treated as resulting in the supply of goods is wider in Poland than it would result from the VI Directive.

In the case of the lease agreement classified as supply of goods, VAT at 22% is imposed on the total value of the lease contract (including interest) at the beginning of the contract (i.e. the release of the assets to the lessee triggers VAT obligation).

Leasing as supply of services

Other lease agreements that do not satisfy the conditions to be classified as supply of goods for VAT purposes, are treated as supply of services. In this case, VAT is charged on each lease installment. The VAT obligation should be declared when part or the whole payment is received by the lessor, however no later than when the payment deadline falls.

The lessee is entitled to deduct input VAT in line with the general VAT rules, i.e. in the VAT settlement for the period when the invoice is received or for the following period.

Leasing of passenger cars - VAT deductions

Lessee Lessee using passenger cars or other cars of the maximum load weight less than 3.5 tons (with certain exceptions) on the basis of a lease agreement is entitled to deduct only 60% of input VAT charged on the lease installments. However, the total amount of deducted input VAT with regard to a given car cannot exceed PLN 6.000.

Lessor The above limitation does not apply to cars purchased by leasing companies provided that those cars are designated for the purposes of leasing activities for at least six months.

Expected changes of tax provisions

Currently, the amendments to both CIT and VAT Act are debated by the Parliament. In line with the envisaged changes some amendments would be introduced with regard to: - the moment when VAT and CIT obligation should be declared, - the moment when input VAT can be deducted, - new definition of passenger cars resulting in new administrative obligation and limiting the deductibility of costs for CIT purposes.

 

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