Leasing ABC's

A Lease Agreement is a transaction under which the Financing Party (Lessor) transfers the right to use an item specified in the agreement to the User (Lessee) for an agreed period of time. The User pays agreed fees and may purchase the object of lease after repayment of all instalments.

The object of lease may be any item classified as a fixed asset, both new and used, necessary for conducting business activity, such as a car, construction equipment, medical equipment, machinery and appliances, IT equipment, assembly line, etc.

Legal basis

Lease is an agreement defined in the Polish law, governed by the following legal acts:

  • Civil Code (Title 7¹) (title added on 26th June 2000; Polish Journal of Laws of 2000 No 74, item 857),
  • Corporate Income Tax Act of 15th February 1992 (consolidated text, Polish Journal of Laws of 2000 No. 54, item 654, as amended – Chapter 4a),
  • VAT Act (Polish Journal of Laws of 2004 No. 54, item 535, as amended),
  • Accounting Act (Article 3 sec. 4) (Polish Journal of Laws of 1994 No. 121, item 591, as amended).

Definition of lease

Lease is a form of financing combining features of both lease/rent and credit.

Lease agreement is an agreement concluded for a specified period of time under which the Financing Party (Lessor) purchases a specific object of lease from a specified Supplier and subsequently gives such an object to the User (Lessee) for use. In return, the User is obligated to pay the Financing Party an appropriate consideration in the form of lease installments.

Parties to the lease transaction:

  • User (Lessee): a natural or legal person conducting business activity which concluded a lease agreement with a lease company, under which it uses the object of lease;
  • Financing Party (Lessor): a lease company;
  • Supplier of the object of lease: a business entity (a legal or natural person) selling and providing the object of lease; in the case of the so-called leaseback the role of the Supplier is fulfilled by the User.

Full Service Leasing

When deciding to take advantage of a long-term rental, you may choose between three services: Full-Service Leasing, Lease & Service and Fleet Management. Below you will find information on what the individual solutions consist in.

Full-Service Leasing (FSL)

Main terms and conditions:

  • Financing the Client’s fleet under an operating lease, rental or lease agreement.
  • Risk related to the residual (final) value lies with the Financing Party.
  • Term of the agreement: at least 24 months.
  • The agreement must cover at least three non-financial services (including always mechanical service).

Leasing & Service (LS)

Main terms and conditions:

  • Financing the Client’s fleet under an operating lease, rental, lease or finance lease agreement.
  • Risk related to the residual (final) value lies with the User.
  • Term of the agreement: at least 24 months.
  • The agreement must cover at least two non-financial services, without the obligation to take advantage of the mechanical service.

Fleet Management (FM)

Main terms and conditions:

  • The company managing the Client’s fleet does not finance it. The fleet management services pertains to vehicles that are the property of the Client.
  • A fleet management agreement is concluded for at least 6 months.
  • Any number of non-financial services.
  • Non-financial services in long-term rental

Most Clients of companies offering fleet services use vehicles taking advantage of a comprehensive service package. It covers, apart from financing, also service and fleet management in all its aspects: operational, administrative, legal and technical. The main non-financial services are:

  • insurance,
  • loss settlement,
  • mechanical service,
  • tyre exchange and service,
  • assistance and replacement cars,
  • fuel card servicing,
  • door-to-door,
  • reporting.

Other leasing services

Apart from the long-term rental you may take advantage of other services addressed at companies that would like to expand their fleet.
Financing: Lease

Main terms and conditions:

  • The lease company finances vehicles under an operating lease, rental or lease agreement.
  • The risk associated with the residual (final) value lies with the User or the Financing Party (depending on the agreement).
  • Term of the agreement: at least 24 months.
  • Agreement pertains to financing only: there are either no non-financial services or just one such service.

Short-Term Rental (STR)

Main terms and conditions:

  • The rental (STR) company finances vehicles in any form.
  • Term of the agreement: maximally 24 months.
  • Any scope of financial services and solutions related to the risk associated with the residual (final) value.

Operating lease in tax law

Operating lease pursuant to the tax acts (Personal Income Tax Act and Corporate Income Tax Act)

Conditions:

A lease agreement is concluded for a specified period of time equivalent to at least:

  • 40% of normative amortization / depreciation period, if the object of lease is a movable or intangible asset subject to amortization / 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.

Tax consequences:

  • A total lease instalment (principal + interest) represents a deductible cost of the User and at the same time revenue of the Financing Party.
  • Amortization / depreciation write-offs are made by the Financing Party.
  • The minimum final value for the User = hypothetical net value (initial value reduced by amortization / depreciation write-offs calculated with the use of the degressive method taking into account amortization / depreciation rate of 3).

Operating lease in accounting

Pursuant to the Accounting Act, an operating lease agreement is an agreement under which the User:

  • 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;

and 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 ¾ 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.

Operating (Tax) LeaseOff-Balance Sheet Operating Lease
Comparison of individual types of lease transactions
Naturerentalrental
(Legal) ownership of the object of leaseFinancing PartyFinancing Party
Right to make depreciation write-offsFinancing PartyFinancing Party
Residual (final) value not lower than the hypothetical valuemarket 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 coststotal lease fee (principal + interest)total lease fee (principal + interest)
Total fees (VAT excluded) equal to at least the initial value of the object of leasetotal 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 UserFinancing Party

Leasing vs bank loan

For those Clients who are contemplating what would be the most advantageous manner of financing for them we have prepared a table that should help them take the decision.

CashLoanOperating (Tax) LeaseFull Service Leasing (FSL)
Comparison of various forms of financing
Used mostly byindividualsindividualscompaniescompanies
Party disclosing in the balance sheetClientClientClientFinancing Party (for the Client it is an off-balance sheet transaction)
Influence on current assetsown funds are frozenincreases liquidity of the company’s current assetsincreases liquidity of the company’s current assetsincreases liquidity of the company’s current assets
Vehicle utilization costsunspecified in the longer termunspecified in the longer termallows to prepare a precise and stable balance for 3-4 yearsallows to prepare a precise and stable balance for 3-4 years
Ownership title to the vehicles lies withClientClientFinancing PartyFinancing Party
Party making depreciation write-offsClientClientFinancing PartyFinancing Party
Financing allocation proceduresnot applicable
  • Complicated and time-consuming
  • Restrictive requirements concerning creditworthiness and rigid terms and conditions
  • Simplified
  • More flexibility than in the case of a loan as regards adaptation to the situation and individual needs of the Client
  • Simple collaterals (bill of exchange + ownership title to the vehicle)
  • Simplified
  • More flexibility than in the case of a loan as regards adaptation to the situation and individual needs of the Client
  • Simple collaterals (bill of exchange + ownership title to the vehicle)
Repayment schedulenot applicable

Repayment schedule is rarely adjusted to the actual depreciation of the vehicle.

Loan repayment instalments are usually distributed over a shorter period of time than the anticipated useful life of the vehicle.

Lease installments may be distributed over a period of time equivalent to the vehicle’s useful life.Lease installments may be distributed over a period of time equivalent to the vehicle’s useful life.
Deductible costsdepreciationdepreciation + interest

entire lease installment (principal + interest)
deferred tax liabilities (the so-called tax shield)

entire lease installment (principal + interest)
deferred tax liabilities (the so-called tax shield)

VATPaid in advance in full by the ClientPaid in advance in full by the ClientPaid by the Financing Party; lease installments are calculated on the basis of the vehicle’s net value.Paid by the Financing Party; lease installments are calculated on the basis of the vehicle’s net value.
Additional servicesNone.
All activities related to the vehicle are performed by the Client
None.
All activities related to the vehicle are performed by the Client.

The Financing Party is responsible among others for:

  • vehicle registration and carrying out other administrative activities related to the vehicle (e.g. registration car exchange)
  • taking out insurances

In the case of FSL the Financing Party is responsible among others for:

  • service,
  • exchanging tyres,
  • vehicle registration and carrying out other administrative activities related to the vehicle (e.g. registration car exchange),
  • taking out insurances,
  • providing spare parts.
Alterations to the vehicle and amendments to the agreementThe vehicle may be freely altered.It is possible to make some alterations to the vehicle.
  • Alterations to the vehicle may be made solely upon the consent of the Financing Party.
  • Little flexibility as regards terms and conditions of the agreement during its term.
  • Alterations to the vehicle may be made solely upon the consent of the Financing Party.
  • Little flexibility as regards terms and conditions of the agreement during its term.

VAT law in leasing

Pursuant to the Tax on Goods and Services Act, the operating lease is treated as provision of services. Therefore:

  • 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 PLN 6,000.

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 PLN 6,000.

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.

In the case of passenger cars whose value exceeds EUR 20 thousand 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 EUR 20 thousand. Depreciation write-offs on partial value of a car exceeding an equivalent of EUR 20 thousand 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 EUR 20 thousand, 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.

TransactionPassenger car*Trucks and vehicles fulfilling the requirements of the Act **
VAT Settlement: Comparison
Vehicle purchase60% (not more than PLN 6,000)100 %
Lease fees60% (not more than PLN 6,000)100 %
Service costs***100 %100 %
Fuel costs0 %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, busses 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.