Car leasing and tax aspects in Poland – what do you have to know?
September 5, 2023
Car leasing in the interest of a business is one of the most popular forms of financing. Up until not long ago, it was also one of the most useful options in regards of settling costs incurred for tax reasons.
What is car leasing?
Leasing is a contract regulated in the Civil Codex (article 7091 – 70918 ). The easiest way to describe a leasing contract is as one sides commitment ( referred to as the financer) to acquire and give the agreed upon item (e.g. A car) to the opposing party in the contract, the user. The user is obligated to pay for the financers item, so called leasing instalments.
Leasing contracts are most often associated with cars, it is however important to highlight, that they can also include machines or industrial equipment.
From 2011 leasing, as a form of financing, is available also for individuals who do not run a business – this so called consumer leasing.
Types of car leasing
Fundamentally we differentiate between two different types of leasing: Financial and Operational. Differentiating these is key for tax purposes. Financial leasing is often regarded as less useful. In the moment of making a decision of the choice of financing, it is worth weighing the options of both types of leasing and to pick the one which will be the best choice in a broader perspective.
Financial leasing
Financial leasing is a contract in which, other than a standard exchange from the financer to the user of the leased item and a payment using leasing instalments, you can find provisions giving the user the right to make depreciation write-offs. The leased item then indeed becomes a fixed asset of the user. Leasing instalments are divided into to two parts – Capital and Interest. The capital part is a de facto payment of the baseline value, and the interest part is treated as a tax-deductible cost. A financial leasing contract has to be agreed for a definite period. However in contrast to operational leasing, there are no statutory restrictions to the duration of this period. What is interesting is that financial leasing for the purpose of VAT taxi s treated as a supply of goods – it ties in with the duty of settling VAT in the moment of transferring the car to the user.
Operational leasing
Operational leasing is a contract on the base of which we have the right to use the leased item (e.g. Car) in exchange for paying monthly leasing instalments. In the case of this type of leasing, in contrast to financial leasing, the user does not have the right to depreciation write-offs, in the costs they will have the right to settle recurring leasing instalments.
More about the operational leasing we wrote here (click on the picture):
Initial leasing instalment
A characteristic element of operational leasing is the so called initial instalment – it is increased by the user at the beginning of the contract. In the past there were no clear positions of tax authorities as to the treatment of the charge as a tax expense. Recently there is no doubt – this charge should be settled once, at the time it is incurred.
Settlement of the costs of operating a car in leasing
An important point is also the way of settling the costs related to the current use of the car in leasing – e.g. Expenses on fuel, washing of the car, servicing, the purchase of tyres – with the exception of insurance costs, which is written about below.
In agreement with tax laws, settling these types of expenditures varies of the use of the car. The tax payer will be entitled to a 100% tax settlement if the car is used exclusively for the purpose of a business. In the instance that the car is used in a „mixed” manner (for business and private uses), only 75% of expenses will be tax-deductible.
Insurance
Expenditure incurred on car insurance are not subject to the limit of 75%. In this instance a separate regulation applies which limits the possibility of counting the contributions into the costs up to the value of 150 000 złoty PLN adopted as the value of the car on the policy. In other words, if the value of the car adopted for insurance purposes does not exceed 150 000 złoty PLN, then we can count the full value of contributions as tax deductible. However if the value of the car exceeds 150 000 złoty PLN then it is necessary to determine the proportion of the car that is valued to the limit, and only this determined part is subject to tax-deduction.
Important! The limit for tax-deduction applies only to voluntary insurance (e.g. AC). However compulsory insurance, like OC can be included in the full costs regardless of the value of the car.
Termination of a leasing contract
In the instance of operational leasing traders have the opportunity to purchase the car after the ending of the agreed upon period on which the contract was concluded. The cost of purchase is most often agreed upon in the contract. In the instance, where we purchase a car as part of our business it becomes our fixed asset and also we will have the right to deduct VAT tax from the invoice issued by the leasing company. The amount of deduction is dependent on how we intend to use the car: 100% VAT is deductible is the car is strictly for business purposes, 50% if it is for mixed purposes.
The second option is to purchase the car for private purposes. In this instance we do not deduct VAT. A more important issue is that, from the 1st of January 2022, if we sell a car before the passing of 6 years – counting from the first day of the month occurring after the month in which the car was purchased from leasing for private purposes – we will have to pay income tax, just like if we would have sold a car as part of our business activity. This is an important change, as before the year 2022 this duty only occurred in the instance of selling a car before the passing of 6 months.
