15 February. the interpretation of the scope of the acceptable modification of the terms of the lease agreement and the determination of the amount of income on the financing side in the case of sale of the lease during the contract to a person has been published third.
Description of the issue on which the tax legislation is interpreted
This Interpretation concerns provisions Article 17a(2) Act dated 15 February 1992 on corporate income tax as in force[2] and Article 23a(2) Act dated 26 July 1991 on income tax on individuals in force[3], as regards the possible modification of the terms of the lease agreement, including its duration or the amount of the lease instalments, and the determination of the effects (the amount of revenue) on the financing side in the case of sale of the lease during the contract, to the person third.
According to Article 17a(1) CIT Act (Article 23a(1) The PIT Act), the leasing agreement is defined as a contract named in the Civil Code, as well as any other agreement under which one of the parties, hereinafter referred to as ‘the financier’, shall return to the use or use for consideration and benefit under the conditions laid down in the Act second a party, hereinafter referred to as ‘beneficiary’, amortised fixed assets or intangible assets, as well as land and land use rights.
The tax consequences of the leasing agreement for the beneficiary and the funder depend on its qualification for operational or financial leasing, based on the criteria set out in Chapter 4a of the CIT Act (Chapter 4a of the PIT Act).
According to Article 17b CIT Act (Article 23b the PIT Act) regarding the recognition of the lease as operating leasing decides that the following cumulative conditions are fulfilled:
if the beneficiary is not a natural person who does not engage in business activities - the lease agreement has been concluded for a specified period of time, constituting at least 40% a standard depreciation period where the subject matter is subject to write-downs of movable or intangible assets or has been concluded for a period of at least 5 years where the subject matter is subject to write-offs of the immovable property,
where the beneficiary is a natural person who does not engage in business activities, the lease contract has been concluded for a specified period of time,
the sum of the charges set out in the lease agreement, less the due tax on goods and services, corresponds at least to the initial value of fixed assets or intangible assets, and, in the case of the conclusion by the sponsor of the subsequent lease of a fixed asset or intangible and legal assets previously the subject of such a contract, corresponds at least to its market value at the date of conclusion of the subsequent lease agreement.
The financing revenue and, respectively, the cost of obtaining the proceeds of the beneficiary shall be the fees established in the operating lease agreement borne by the recipient during the basic period of the contract for the use of the subject matter of the contract.
According to Article 17f CIT Act (Article 23f the PIT Act) on the recognition of the lease as a financial lease determines the cumulative fulfilment of the following conditions:
the lease agreement has been concluded for a specified period of time;
the sum of the charges set out in the lease agreement, less the due tax on goods and services, corresponds at least to the initial value of fixed assets or intangible assets, and, in the case of the conclusion by the sponsor of the subsequent lease of fixed assets or intangible and legal assets previously the subject of such a contract, to at least its market value at the date of conclusion of the subsequent lease agreement;
the contract provides that during the basic period of the lease agreement:
Amortisation write-offs shall be made by a beneficiary who is not a natural person who does not have a business activity, or
the funder resigns from making depreciation write-offs and the beneficiary is a natural person who does not carry out business activities.
The financing revenue and, respectively, the cost of obtaining revenue benefiting from a financial lease shall not include leasing charges in the part which represents the repayment of the initial value of the lease subject, but only the interest rate of the lease instalments.
At the same time, the financing revenue and the costs of obtaining the revenue of the beneficiary are the leasing charges obtained for all leasing contracts relating to the same subject-matter of the contract, in part exceeding the repayment of its initial value.
The fulfilment of the conditions set out above for operational or financial leasing entitles the sponsor to settle the purchase of the lease under the conditions indicated above under Article 17c either Article 17g CIT Act (Article 23c either Article 23g PIT Act).
In the light of those provisions, if after the expiry of the basic period of the lease, the sponsor transfers to the beneficial owner the assets or intangible assets covered by that contract:
the sales revenue is their value expressed in the price specified in the sales contract, with:
- in the case of operating leasing, where the price is lower than the hypothetical net value of fixed assets or intangible assets, the income shall be set at market value according to the rules laid down under Article 14 CIT Act (Article 19 PIT Act),
- in the case of financial leasing, also where it deviates significantly from their market value,
at the expense of obtaining revenue when determining sales income:
- in the case of operating leasing, the net actual value,
- in the case of financial leasing, expenditure incurred by the funder for the acquisition or production of fixed assets or intangible assets which are the subject of a leasing contract less the repayment of the initial value[4].
As indicated above, one of the key terms of the lease agreement is that it is concluded for a specified period of time (in the case of an operating lease, which is at least 40% the standard depreciation period).
However, according to Article 17a(2) CIT Act (Article 23a(2) PIT Act) basic lease term[5] is defined as the specified time for which the contract is concluded, excluding the time for which it may be extended or shortened. That provision also provides that, in the event of a change of the party or parties to that agreement, the basic term of the contract shall be considered to be retained if the other provisions of the contract have not changed.
Against the background of the wording of these provisions, significant doubts arose regarding the permissible scope of the modification of the provisions of the operating or financial lease agreement, in the context of the impact on the applicability of Article 17c either Article 17g CIT Act (Article 23c either Article 23g PIT Act).
Clarification of the scope and manner of applying the tax legislation to the matter described and the legal justification
- 1. Modification of the terms of the lease agreement and preservation of the terms of classification of the contract as operating or financial lease
Where the parties decide to modify the provisions of the operating lease agreement, it is necessary to examine whether the new terms of the contract meet the criteria resulting from the Article 17b(1) CIT Act (Article 23b(1) PIT Act). Similarly, in the event of a planned revision of the provisions of the Financial Lease Agreement, it is necessary to examine the impact of the proposed modifications on the criteria envisaged under Article 17f(1) CIT Act (Article 23f(1) PIT Act).
The modifications to the lease agreement may relate in particular to the modification of the payment schedule by:
- reduction of the value of the required lease instalments due to the extension of the duration of the contract,
- increase in the value of the required lease instalments as a result of shortening the duration of the contract (but not less than 40% the standard depreciation period of the leasing subject,
- suspension for a specified period of payment of instalments,
- reduction of instalment payments over a certain period of time,
the extension of the duration and reduction of the value of the required leasing instalments, while suspending for a certain period the payment of the instalments and increasing/decreasing the amount of the lease instalments after the period concerned (the value not repaid for the given period of the capital part of the lease instalments).
In the context of sound Article 17a(2) CIT Act (Article 23a(2) The PIT Act), if the modifications mentioned (including the payment schedule) do not result in a breach of the conditions for considering the contract as operating or financial leasing, do not affect the subsequent application by the financier Article 17c either Article 17g CIT Act (Article 23c either Article 23g The PIT Act) in respect of sales transactions to the subject-matter of the lease agreement after its conclusion.
At the same time, it is unacceptable to modify the terms of the contract which would lead to the conversion of the lease agreement one of a kind in second (the change in the qualification of the contract) – it must be mandatory for the entity making the tax amortisation of a fixed asset which is the subject of leasing.
- 2. Modification of the lease agreement Under point 2.1 in conjunction with the amendment of the parties to the agreement
In case of modification of the leasing contract content (including by changing the schedule – see point 2.1. This interpretation), combined with the amendment of the parties to the agreement by assigning or entering into a leasing (financing or benefiting) ratio, should be re-applyed to Article 17a(2) CIT Act (Article 23a(2) PIT) in fine, according to which, in the event of a change of the party or parties to that agreement, the basic term of the contract is considered to be retained if the other provisions of the contract have not changed.
The CIT and PIT Act does not explain the concept of ‘other provisions of the contract’. However, given the literal wording of the provision, it should be assumed that this reimbursement refers to those provisions (the terms of the contract) which determine the legal existence of the lease agreement for income tax purposes.
Furthermore, this concept is included in the scope of the regulation referring to the basic term of the lease agreement as one of the essential conditions for considering operating or financial leasing. This provision should therefore be considered taking into account the whole provisions of the CIT Act (PIT Act) on leasing taxation.
"(...) No rule of law is a detached individual, but it occurs in a system context – it is part of a specific normative act, which in turn is part of a specific branch of law belonging to the Polish law system.
Thus, when laying down a provision of law, account must be taken of its relationship to other provisions of the normative act (internal interpretation) and to those contained in other laws (external interpretation) (...)’[6]. Regulations should also be taken into account Act dated 23 April 1964 Civil Code[7].
The lease agreement defined by the tax rules is essentially a lease agreement within the meaning of civil law, but only its specific elements, as defined in the CIT Act or in the PIT Act, are crucial to triggering tax effects. Other issues, regulated in the Civil Code, remain irrelevant.
Following the entry into the lease agreement during its duration, a new entity generally enters the rights and obligations of the party concerned.
However, these are rights and obligations arising from the content of the contract, which has not changed as a result of the sale of the lease agreement[8] and therefore does not require a re-tax verification.
These rights and obligations shall not depend on the entity acting as a party to the contract if it performs a civil law and tax law which is unchanged from the lease agreement in question.
Supreme Administrative Court by resolution seven Judges from 23 May 2016,reference no. II FPS 1/169, has resolved a legal issue directly related to the effects of the leasing contract being transferred in the legal state before 1 January 2013, i.e. before the amendment Article 17a(2) CIT Act (Article 23a(2) PIT Act – see footnote 5).
The NSA ruled that the modification of the lease agreement by the party to the lease agreement during the basic period of the contract, with the remaining provisions unchanged, did not result in a need to re-examine it from the perspective of meeting the requirements laid down under Article 17b CIT Act.
Change of sound from day 1 January 2013, The definition of the basic lease period was intended to allow the sale of the lease agreement in a way that did not entail the need to re-examine the fulfilment of the terms of the tax lease agreement. Therefore, given that the purpose of the Law 16 November 2012 reducing certain administrative burdens in the economy (see also footnote 5) there has been an improvement in the operating conditions, including by removing or reducing barriers to the development of entrepreneurship, it cannot be concluded that at the date 1 January 2013 the legal position of taxpayers deteriorated as compared to the situation prior to that change.
This means that the amendment of the ‘other provisions of the contract’ is only such a change, as a result of which the contract would no longer fulfil the conditions for its recognition as a lease agreement for tax purposes.
The modification of the parties to the lease agreement often results in a change in other conditions relevant to civilisation, such as:
- the collateral established for the lease agreement,
- the address details of the parties to the lease agreement,
- the rules for charging the beneficiary with additional fees (except for charges likely to arise during the lease contract (in particular where the rights and obligations of the beneficiary are entered by a single-person operator).
It is assumed that such modifications to the terms of the lease agreement that do not affect its classification as a lease agreement for tax purposes are not amendments to the ‘other terms of the lease’ referred to under Article 17a(2) CIT Act (Article 23a(2) PIT Act) in fine.
- 3. Sale of the lease by the financier to a non-beneficiary entity during the contract
The transfer of ownership of the property (the leasing subject) during the lease agreement changes the entity that is a party to the lease. The acquirer of the goods enters into the leasing ratio instead of the financier (in the legal situation of the seller resulting from the lease agreement).
This effect comes from the law itself and in fact means that the purchaser becomes an entity of all the rights and obligations of the funder resulting from this legal relationship.
‘Other provisions of the contract’ within the meaning of Article 17a(2) in fine CIT Act (Article 23a(2) in fine PIT laws) remain unchanged[10] (Watch points 2.1 and 2.2 this Interpretation).
In this context, the issue to be resolved is the correct determination of the amount of income in connection with the financial change (transfer of ownership of the lease to the new financier), i.e. whether it will be revenue from the sale of the lease item equal to the value not paid by the beneficiary of the capital (exposure).
Provision Article 14 CIT Act (Article 19 The PIT Act states that the income from the sale of goods or property rights for consideration is, in principle, their value expressed in the price specified in the contract. However, if a price without a legitimate reason deviates significantly from the market value of those goods or rights, this income shall be determined by the tax authority at the level of the market value.
At the same time, it should be noted that the determination of the financing income at a value equal to the market price of the goods, solely on the basis of the conditions of Article 14 CIT Act (Article 19 The PIT Act), would lead to a risk of default by the beneficiary of the lease subject-matter on the assumption that the lease agreement would continue[11].
Consequently, the financing income is the value expressed in the price specified in the contract, subject to the condition that if the sales price is at the level of the value of the capital not paid by the recipient, it is to be considered to be in line with the market value.
1 Journal of Laws of 2020, item 1325, as amended
[2] Journal of Laws of 2020, item 1406, as amended (hereinafter referred to as ‘CIT Act’).
[3] Journal of Laws of 2020, item 1426, as amended (hereinafter: ‘PIT Act’).
4 According to Article 17a(7) the repayment of the initial value shall be understood to be the amount of the initial value of fixed assets or intangible assets actually received by the sponsor in the fees fixed in the lease agreement, determined in accordance with Article 16g, during the basic period of the lease agreement; this repayment shall not be adjusted for the amount paid to the beneficiary in question under Article 17d either Article 17h.
5 Sound from Day 1 January 2013 Power Act dated 16 November 2012 reduction of certain administrative burdens in the economy (Journal of Laws, item 1342).
6 Cf. Supreme Administrative Court judgment dated 26 May 2011, reference no. II FSK 115/10
[7] Journal of Laws of 2020, item 1740 (hereinafter referred to as ‘the Civil Code’).
8 It therefore met the requirements laid down by the Tax Act relating to the content of the leasing contract, the minimum duration of the lease, the conclusion of a fixed-term contract or the amount of the sum fixed in the lease agreement.
9 Resolution taken under the provisions of the CIT Act.
10 Lt. K. Kopaczyńska-Peczniak, Comment to Article 709(14) Civil Code, LEX 2014
11 Cf. judgment of the Provincial Administrative Court in Warsaw 9 June 2016, reference no. III SA/Wa 1674/15, final decision.