Changes in the taxation of passenger cars used by traders

Start 2019 the revised tax rules have come into force, including new regulations on passenger cars used by entrepreneurs. They have made significant changes in the cost of obtaining revenue in relation to their use and rental, leasing and depreciation costs.

one the objectives are to reduce the attractiveness of operating leasing of luxury passenger cars.

The subject of this study is to analyse the amendment as compared to the existing legislation and to assess its effects on income tax taxable persons, together with the identification of those groups of entrepreneurs who will bear the highest fiscal burden on the use of vehicles.

Introduction

Before discussing changes affecting entrepreneurs from 1 January 2019, it should be clarified how the concept of "passenger car" is defined in tax regulations. By Article 4a(9a) Act on 15 February 1992 on corporate income tax[1] and Article 5a.

point 19a Act on 26 July 1991 on personal income tax[2] is a vehicle within the meaning of traffic regulations[3] with a total permissible weight not exceeding 3.5 tonnes, designed to carry no more than 9 persons including the driver, in addition to not meeting the many exceptions specified in those provisions.

If the vehicle complies with the above requirements, the documents issued in accordance with the traffic regulations, including registration.

In the case of certain vehicles, compliance with the requirements to prevent the vehicle from being counted on passenger cars shall be established on the basis of an additional technical examination carried out by the district vehicle inspection station, as confirmed by the certificate issued by that station, and the registration certificate of the vehicle containing an appropriate endorsement of compliance with those requirements.

Under the Amending Act 4 These rules apply only to passenger cars: 1) purchased or produced by the taxable person from 1 April 2014; 2) used on the basis of a lease, lease, lease or other similar contract, concluded on 1 April 2014.

Among the main changes in the cost of obtaining the revenues of expenditure incurred in the use of passenger cars, there is certainly a need to raise the statutory limits on acceptable depreciation payments. However, this is one with few benefits for entrepreneurs.

Despite the softening of the content of the initial projects, many changes are still unfavourable to them, inter alia, due to the inclusion of these limits also of cars obtained in operating leasing and the reduction of the ability to account for the operating costs of vehicles used for both business and private purposes.

This clearly indicates the fiscal nature of the changes. In the interests of transparency of publication, the author focuses first on the analysis of the revised provisions on the various forms of acquisition of a passenger vehicle and then on the discussion of the records relating to operating expenses.

Acquisition of a vehicle and revenue costs

It is not possible to imagine the running of one's own business – regardless of its type – without its own means of communication, and it would be true to remind about the delivery of goods to customers in a company car or to arrive at business meetings – a business car is an essential tool for every entrepreneur and is a means of obtaining revenue, and the related expenditure should be included in the costs of obtaining these revenues.

There are no such doubts with regard to heavy duty vehicles, but they appear for passenger vehicles. The legislator has laid down a number of rules concerning the recognition of these costs for tax costs.

In the light of the provisions applicable to 31 December 2018 the purchased vehicle should have been entered in the register of fixed assets if it exceeded the value 10,000 zł[5]. Only write-offs for car use, i.e.

depreciation, could be considered as tax costs, although only in a certain part determined on the value of the car not exceeding the amount20 000 euros[6] or 30,000 EUR for electric passenger cars[7].

The conversion of these values takes place at the average rate announced by the National Bank of Poland on the day of the transfer of the car for use. This depreciation was carried out in accordance with the principles set out in the Act.

In other words, only that part of the write-down that was in the same ratio to monthly depreciation as the equivalent 20,000 EUR up to the total value of the vehicle, could be considered as the cost of obtaining income.

Example

The taxpayer bought a car for 200,000 PLN, transferring it immediately to use. The depreciation rate is twenty percent and the average course 1 EUR, for simplification of calculations, 4 PLN. In this case, the equivalent 20,000 EUR would be 80,000 PLN and to this value alone, depreciation would be the tax cost. Value of annual write-down 40,000 PLN (20% from the value of the car), of which only 16,000 PLN These are costs within the meaning of the Income Tax Act.

The purchase of a vehicle, described in the above example, is the easiest way to acquire a passenger car, which does not mean that it is the most effective. The most popular method of obtaining a car for the company for years is leasing, but it can also be done through other civil law contracts, such as rent or lease.

Leasing, according to the Income Tax Act[8], split into operating and financial – similar in tax consequences to the lease agreement. However, these are common names not appearing in tax legislation. The main difference between operational and financial leasing is who is required to amortise a fixed asset.

In the case of operating leasing, the car is a permanent measure leasing provider (the leasing firm), which conducts its depreciation, and in the case of financial leasing, this obligation shall be transferred to the leasing of the borrower. In order to qualify for operational or financial leasing, the relevant conditions specified in the laws must be met. Contracts not meeting these conditions shall be treated as rental contracts[9].

This is confirmed by the verdict one from the administrative courts: ‘At the same time, the Authority pointed out that it was not appropriate to refer only to certain conditions governing the existence of a leasing contract under the tax law in order to recognise its tax nature.

The legislator clearly indicated that it is necessary to meet them cumulatively (these conditions), by using the provision Article 17b(1) “and” Conjunction Laws, while with regard to financial leasing, also by stating unequivocally and categorically that the provisions Article 17f(1) PDP conditions must be met “total”.

Therefore, it cannot be denied the reasoning presented in the interpretation that, where any of these conditions is not fulfilled, the contract is not of a tax nature of a lease agreement and has tax implications for lease and lease contracts(Article 17l Act)’[10].

As indicated in the above judgment, only contracts fulfilling all the conditions specified Under Articles 17b(1) and 17f(1) the Corporate Income Tax Act, by Under Articles 23b(1) and 23f(1) u.p.d.o.f., can be defined as operating or financial leasing agreements.

Otherwise, the provisions on leases or leases specified in the earlier provisions should be applied. Tax costs are also recognised differently. In the case of operating leases, these are all the costs associated with the leasing contract in question, incurred during the basic period, i.e.

during the specified period for which that contract is concluded. However, they may be determined in different sizes and depending on the VAT status of the taxable person and whether he provides services exempt from that tax may vary from the net amount to the gross amount of leasing charges.

This depends on the possible VAT deduction[11]. On the other hand, financial leasing uses a completely different approach. As responsibility for including the car in the register of fixed assets and deducting depreciation lies with lessee, it is these costs that can be regarded as tax costs, using general principles[12].

In addition, the cost may be considered to be the percentage of leasing instalments. In this case, it is important to see how the initial value of the passenger car should be determined. The provisions do not lay down specific rules on this matter, as a consequence, the general rules apply here too.[13].

This means that the initial value of a passenger car taken in a financial leasing is the purchase price, i.e. the sum of the capital of the part of the contract, plus the costs associated with taking the car into the lease, calculated by the date of the transfer of the car for use[14].

In the past, the issue was how the costs of pre-payments should be settled by taxpayers using accruals. It was the view of the tax authorities that these costs should be allocated in proportion to the duration of the lease agreement. This view is no longer valid and these costs currently represent the cost of obtaining revenue once on the date on which they are incurred, regardless of the method of accounting for costs chosen[15].

From 1 January 2019 significant changes have been made to the cost accounting rules for revenues in the event of acquisition of the car. First of all, there have been changes in the way depreciation is accounted for from passenger cars.

Limits for the ratio of acceptable write-offs to vehicle value to level were raised 150,000 PLN and 225,000 PLN for electric vehicles.

The provision on electric vehicles was to be applied only after the European Commission had announced a positive decision on the compatibility of the State aid provided for in those rules with the common market and on its finding that these regulations did not constitute public aid.

The relevant communication is published on the website of the Ministry of Energy 18 December 2018. In addition to changes in depreciation write-downs, the new rules also introduced analogous changes in operating leasing[16].

In this case, too, it is not included in the cost of obtaining revenues from the leasing agreement, as well as from leases, leases or other similar contracts, in excess of those fixed in proportion to the amount150 000 PLN or 225,000 PLN in the case of an electric car, it remains to the value of the passenger car covered by that contract.

Under the transitional provision[17] the introduced regulations concern passenger cars entered into the register of fixed assets and leases, leases, leases and other similar types of vehicles signed, amended or renewed after 31 December 2018.

Costs related to the use of passenger cars

The changes made mainly included entrepreneurs using both business and private vehicles, but also all companies using leasing.

Amendment in force since 1 January 2019 the aim is to increase the tax base for those economic operators, so it is worth noting several legal solutions that could neutralise the increase in the tax burden on the use of cars.

For comparative purposes, it should be recalled how the settlement of these expenditures on passenger cars looked like to 31 December 2018. If the vehicle was entered in the register of fixed assets, all operating expenses could be considered as the cost of obtaining income.

However, according to the provisions of tax laws[18] where the vehicle not entered in the register of fixed assets was used, it did not cost expenditure[19] in part exceeding the amount resulting from multiplying the number of kilometres of actual running of the vehicle for the purposes of the taxable person and the rate per one kilometre [20], colloquially called "kilometer".

This meant that the taxable person was obliged to keep adequate records of the course of the vehicle and also concerned passenger cars owned by a natural person operating and not entered into the records of fixed assets. This set the upper limit on the crediting of expenses related to the vehicle used for business-private purposes.

At the end of the accounting period, the taxpayer compared two amount: the amount of the increase in the beginning of the year in the number of kilometres driven and the km rate and the amount of expenditure arising from the beginning of the year relating to the use of the vehicle.

The cost of obtaining revenue was second of these amounts, but only up to this amount first.

Keeping adequate records was therefore imperative 21 to consider the above-mentioned expenditure as revenue costs, which is also highlighted in the case law: ‘It should therefore be recognised that the provisions Article 16(1)(51i) 30 – in conjunction with section 5 – the Corporate Income Tax Act in the part setting out the way in which the revenues of the expenditure in question for the use of foreign passenger cars are included in the costs are specific provisions, to which the principle of Article 15(1), laying down additional formal requirements.

Such additional requirement is the obligation to keep track record of the vehicle.

This obligation has been clarified under Article 16(5) the Corporate Income Tax Act, according to which mileage of the vehicle concerned Under section 1 pkt30 i 51, shall be, except for a flat-rate payment, documented in the vehicle record at the end of each month as confirmed by the taxable person.’[22].

It should also be pointed out that the taxable person could only include expenditure actually incurred on the use of a passenger car, and therefore had to collect appropriate accounting evidence to document that expenditure.

This applies to all costs associated with the operation of the car, such as repair and repair costs, purchase of parts, tyres and possible insurance premiums[23]. This applies not only to purchased vehicles but also to rented or leased vehicles, and such a contract will not be classified as leasing.

Personal vehicles acquired in this form shall not be subject to registration limits[24].

There was therefore a problem as to whether the rent costs should be recognised without this limit. The tax payers have often stressed that this limit applies only to the financial burden on the operation of the vehicle (the application was in line with the linguistic interpretation) by claiming that the rent is a remuneration landlord for withdrawing the right to use things.

Initially, the authorities presented a completely different view of the case.[25]. However, the case law of the NSA, which was much more favourable to taxpayers, had an impact on the change of this position. Subsequent judgments allowed the rent to be included in the costs of obtaining revenue on general terms:

• „The costs incurred by the taxpayer for the rental of a passenger car do not fall within the concept of “costs of use” in question. Under Article 16(1)(51) Act on 15 February 1992 corporate income tax, and should be eligible under the general principles contained under Article 15(1) that law, excluding the limit laid down in its Article 16ust. 1 point 51”26;
• „Provision Article 16(1)(51) the Corporate Income Tax Act only costs for the use for business purposes of passenger cars which are not the assets of the taxpayer, i.e. the costs of using the car, its use. This provision does not concern the cost of obtaining the possibility to use such a car. In other words, all types of operating expenditure may be eligible for the costs of using the car, but unlike the costs incurred to obtain the legal title itself, allowing the use of the car. Thus, while the expenditure on the purchase of fuel, highways, parking lots, etc., is one of the costs of using the car, the expenditure on the rental of the car no longer belongs to the cost of using it, as it is the expenditure on obtaining a legal title enabling the use of the car’[27];
• „Limitation resulting from Article 16ust. 1 point 51 the Corporate Income Tax Act is valid, but only applies to expenditure incurred for the use of the car, i.e. expenditure of an operational nature. This limitation does not apply to expenditure of another type incurred in obtaining the possibility of using a car in the form of acquisition of a specific title which entitles it to use; such expenditure may, inter alia, be the rent of the car’.[28];
• „Rent of cars does not fall within the concept of operating costs of the vehicle in question under Article 16ust. 1 point 51 the Corporate Income Tax Act”[29].

This ultimately led to a general interpretation in mode Article 14a Act on 29 August 1997- Tax Ordinance[30]. In this interpretation, the Minister of Finance confirmed the taxpayer’s position that rent may be included in the cost of obtaining revenue on general terms rather than resulting from vehicle mileage records[31].

From 1 January 2019 These provisions have been redesigned. There has been a division of passenger cars, from the point of view of operating costs, into three groups of which first occurs only on the grounds of u.p.d.o.f.

and concerns vehicles which are owned by taxable persons who are not assets within the meaning of Article 14(2)(1) This bill. In that case, only tax costs may be included 20% incurred operating expenses of such a vehicle, including insurance premiums[32]. This amount also includes VAT[33].

The requirements for keeping track record of the car were also abolished in order to be able to include these expenses as revenue costs. second from separate groups includes passenger cars not belonging to the previously mentioned, in the case of u.p.d.o.f.

With regard to the rules governing income tax on individuals, this group includes all passenger cars used in a mixed manner, which are a permanent measure in the company.

The revised rules provide that in this group the cost of obtaining revenue may be included: 75% expenditure incurred for the operation of passenger cars, including VAT[34], evidenced by accounting evidence; insurance premiums in part corresponding to the value of the car accepted for insurance purposes not exceeding 150,000 zł[35].

It can therefore be noted that at the same time there is a removal of the limit resulting from the registration of the passenger car, but also a reduction in the deductionable amount (from 100% to 75%). This applies in particular to taxable persons who did not exceed those limits.

The possibility of deducting insurance premiums for vehicles with a value of more than150 000 PLN. third a group of passenger vehicles are cars used exclusively for the purposes of the economic activity of the taxpayer.

The condition for a permanent measure to be considered as a vehicle of that group is, in principle, the taxpayer's keeping a record of the conduct of the car. For this purpose, taxpayers may use VAT records[36]. In such a case, all costs of using such cars may be charged for the cost of obtaining income without change.

However, a limit was imposed on the amount of the insurance contribution, as in the group second.

The majority of the revised rules, although they seem to be relatively transparent, may create some confusion among taxpayers, consisting of assigning the vehicle to the appropriate group and determining the costs accordingly. This will particularly apply to insurance premiums. The accounting scheme for these expenditures is illustrated in the following example.

Example

The taxpayer company insures a passenger car used exclusively for business purposes. The value of the car accepted for insurance purposes is 200,000 PLN. Annual insurance premium: 8,000 PLN.

This means that only 6,000 PLN will be the cost of obtaining income as this is the part corresponding to the value of the car not exceeding 150,000 PLN:150,000/200,000 PLN = 75%75% * 8,000 PLN = 6,000 PLN

It is also worth pointing out that to the second or third groups do not belong exclusively to cars owned by taxpayers but also used under leasing, rental, lease or other similar contract. It means that the same rules apply to them.

If these cars are used in a mixed manner and the fee, together with the rent, for such a contract is calculated in such a way as to cover the cost of operation of the passenger car, the reduction in the amount of expenditure constituting the cost of obtaining revenue to 75% only applies to the part of the fee covering the operating costs of a passenger car[37].

Kilometer - yes or no?

To the end 2018 Businesses taxed on natural persons were obliged to drive a kilometres for private passenger cars used in business. From 2019, because of the proposed provisions, this requirement has been removed[38].

However, this obligation still applies to the employees of these companies if they wish to claim reimbursement of costs incurred for the operation of the car.

In spite of the changes made to the tax laws, they did not, for example, affect the content of the Finance Minister’s regulation on the tax statement of revenues and revenues, which continues to state that: ‘Expenditure on the use of assets not entered in the accounts and on the intangible and legal assets of a passenger car, including those owned by an economic operator, should be entered in that column after the end of the month on the basis of a monthly statement of expenditure incurred.

The sum of expenditure included in the cost of obtaining revenue, per month, determined from the start of the tax year, shall not exceed the amount resulting from the vehicle running record for the same period, the amount resulting from the multiplication of the number of kilometres of actual running of the vehicle and the rate for one mileage as defined by the relevant minister’[39].

As a result of the deviation of the kilometres mentioned above, part of the regulation is now obsolete. This is not the only doubt that has not yet been explained. There are also others, such as this one, or should such operating costs be included in the book on the basis of invoices or purchase accounts, or a monthly statement of expenditure can still be drawn up, and this should be included in the cost of obtaining revenue?

There is also a problem of adequate justification for such costs. So far, the binding evidence was just a record of the vehicle's mileage. first Doubts have already come before the WSA.

one the Director of the Chamber of Tax Administration of the recently issued decisions challenged proving that expenditure relating to the rental of a passenger vehicle for the President of the company was justified.

The invoices for the rental and payment of the service proved insufficient, ‘The tax authority acknowledged that it was not necessary to record the vehicle's mileage expenditure properly. At the same time, he claimed that it was not the will of the legislator to charge taxpayers with such an obligation.

Unfortunately, the Director of IAS did not draw correct conclusions from these correct ones,” explains Mateusz Kaczmarek, tax adviser. It stresses that in respect of cars for which users kept track record of the vehicle, the authorities considered that the relationship between rent expenditure and the company's income was duly documented.

Its absence with regard to the car used by the President proved decisive in recognising the lack of proper documentation’[40].

Summary

From 1 January 2019 the accounts relating to the acquisition of passenger vehicles and the costs of their operation have been changed.

Unquestionably, the biggest losses due to this amendment will be recorded by entrepreneurs using both business and private vehicles and entrepreneurs signing leasing or hiring vehicles more expensive than 150,000 PLN – luxury cars. These taxpayers, who will be able to settle depreciation in higher amounts, are definitely gaining.

Nor has it been done, as is usually the case with such drastic changes, without ambiguity concerning in this case mainly the obligation, or not, to keep records of the operation of passenger vehicles, especially since these provisions are extremely different from the regulation of the Services Goods Tax Act[41].

The clarifications of the Ministry of Finance solve all the problems, so it remains to wait for a single position to be reached on this issue.

The Ministry of Finance presented the changes as a facilitation for entrepreneurs, by removing the requirements for running the kilometres and increasing the limits for depreciation write-offs. Although it cannot be denied to the authors of the amendment that these objectives have not been met, other changes reduce the benefits that they can bring to entrepreneurs, starting with the incomplete elimination of the obligation to run a kilometres, as it still applies to employees of companies charged with tax on individuals, and ending with the reduction of the acceptable costs up to the amount of 75% for passenger vehicles used for both business and private purposes.

Without doubt, the biggest tax effects will be felt by the owners of the leased vehicles, by limiting the possibility of deducting the related expenditure. Given the above, it can be concluded that the main objective of the amendment to the taxation of passenger car-related expenditure was to increase the fiscal burden on entrepreneurs.

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29 NSA judgment in Warsaw with 16 March 2012, reference no. II FSK 2030/10.

[30] i.e. Journal of Laws of 2018, item 800 as amended

31 General interpretation of the Minister of Finance from 8 November 2013, No DD2/033/55/MWJ/13/RD-111005.32 Renewal Article 23(1)(46) u.p.d.o.f.

33 According to Article 86a(1) the VAT Act such expenditure shall not constitute input tax. Confirmed under Article 23(5a) u.p.d.o.f.

34 As above; Article 23(5a) U.p.d.o.f. and Article 16(5a) the Corporate Income Tax Act

37 New Sound Article 23(3b) U.p.d.o.f. and Article 16(3b) the Corporate Income Tax Act

38 However, it should not be confused with driving a kilometres for personal tax purposes with driving a kilometres for goods and services tax purposes.

39 Regulation of the Minister of Finance of 26 August 2003 on the keeping of a tax revenue and expense book, i.e. Journal of Laws of 2017, item 728 as amended

40 Lt. K. Koslicki, a business car not for the CEO of the company?, 26 April 2019, www.prawo.pl .

41 This applies in particular to the ambiguity in how a taxable person who, under the income tax rules, is not obliged to keep records will be able to demonstrate the link between the expenditure incurred with the performance of taxed activities and the right to deduct 50% VAT.