Last bell for car depreciation

Although the car in today’s economic reality is once again growing to a luxury good, due to rising fuel prices of all kinds, there is no denying that it is often a necessary tool for doing business. An effective taxpayer makes decisions to minimise the tax burden (within the limits of the law) as much as possible, which is a natural course. Soon, however, its capabilities will be reduced again.

Change, change, change...

This slogan should no longer surprise Polish taxpayers, because their pace for several previous years was fast, and in recent months the legislator has additionally pressed the gas pedal. The one which has become the subject of this Article has not been widely commented on, but also makes significant implications for taxpayers.

Act dated 2 December 2021 amending the Electromobility and Alternative Fuels Act and some other laws (Journal of Laws, item 2269, Further: The Amending Act), introduces a significant restriction on the depreciation of passenger cars in both income tax laws[1].

To show how important these changes will be, it is worth writing that in March 2021 the participation of companies in the total number of passenger car registrations was 74.06%[2]. Income Tax Act defines a passenger car as:[3]

„vehicle within the meaning of the traffic regulations with a maximum permissible mass not exceeding 3.5 tonnes, designed to carry no more than 9 persons including the driver, except:

(a) a vehicle having one a row of seats which is separated from the part intended to carry loads by a wall or a durable bulkhead:

• – classified under traffic rules to sub-species: multitask, van or
• – with an open part intended for the carriage of cargo,
• (b) a vehicle which has a driver's cab from one row of seats and bodywork intended to carry loads as structurally separate components of the vehicle,

(c) a special vehicle if it appears from documents issued in accordance with traffic regulations that the vehicle concerned is a special vehicle and if the conditions contained in the separate provisions specified for the following uses are also met:

• electrical/welding unit,
• for drilling,
• excavator, excavator,
• charger,
• lift for maintenance and assembly work,

Car crane.

(d) a vehicle as defined in the regulations issued under Article 86a(16) Goods and Services Tax Act;

In 2019 There have been many significant changes in the cost accounting of passenger cars, including changes in the amount of deductible depreciation costs. In the current version these limits are 225,000 PLN in the case of an electric car[4]  and 150,000 PLN for other passenger cars[5].

Before 2019 These limits were respectively 30,000 and 20,000 EUR converted into gold at the average euro rate announced by the National Bank of Poland on the day of the transfer of the car for use. In addition, the limits were also covered by expenditure on passenger cars used on the basis of operating leasing and rental.

This means that write-offs for the use of the car in parts determined from the value of the car exceeding those amounts do not constitute revenue costs.

Example

The taxpayer acquired a passenger car, which is not an electric vehicle or a hydrogen-powered car, in the amount 300,000 PLN for business purposes. This means that only half (limit is 150,000 to 300,000 what constitutes 50% the value of the car) the depreciation of this car will be the tax cost of obtaining income.

After three years another change in this matter has been introduced, which will apply from 2026 It would seem that the term is rather distant. However, it should be remembered that, as a standard, passenger cars are depreciated by the rate 20% to 5 years. Year 2022 is then the last to use full write-downs if he wants to be sure of the planned budget.

five years is a very distant time for legislators and there is no guarantee that the transitional provisions will remain in the current wording.

In the original version of the amending act they were not specified at all, only at a later stage of the work was added Article 30 The amending act states that: ‘To vehicles entered into the register of fixed assets and intangible assets of the taxpayer before the date of entry into force Article 23(1)(4)(47a) and section 5e Amended Act under Article 3, as provided for in this Act, and Article 16(1)(4)(49a) and section 5e Amended Act under Article 4, as provided for in this Act, the provisions of the amended laws shall apply.

Under Article 3 and Article 4, in the version to date’. An example of changes to regulations before their entry into force we had at least when implementing Polish Deal.

The Ministry of Finance also had doubts about this[6], because in the original draft, the regulations referred to the purchase of vehicles, which was fortunately clarified in the final amending law.

According to the wording of the amending law, the limits will already apply third category of cars, which is added another determinant of CO emissions[2], Which is supposed to favor low-carbon cars. From 2026 The depreciation limits shall be:

• 0 PLN – in the case of an electric passenger car and a hydrogen-powered passenger car[7];
• 0 PLN – for a passenger car whose CO emissions[2] from the internal combustion engine is less than 50 g per kilometre;
• 0 PLN – for a passenger car whose CO emissions[2] from the internal combustion engine is less than 50 g per kilometre;

Of which emissions will be determined on the basis of the data contained in the central vehicle register concerned under Article 80a Act dated 20 June 1997 Traffic law.

Ecology or finance?

The explanatory memorandum to the Amending Act indicated that the new solutions are designed to bring the rules into line with EU regulation and to lay down national rules on the depreciation of low-carbon vehicles. They were guided by better solutions. Looking at the solutions contained in the Act, it is easy to notice that the effect may be inverse to the intended one.

After first, these rules do not introduce more favourable solutions for such vehicles than those currently in force. Additional distinction has been added for vehicles with higher than assumed 50 g per km of emissions, lowering the deductionable depreciation costs. This is therefore a form of ‘scaring away’ from these vehicles rather than encouraging a greener choice. It is worth remembering that this form of encouragement does not always have the same effective effect as additional relief.

After second, which is also linked to the previous point, such a design of the rules does not seem to take account of changes in the car market and taxpayers' approach to expenditure.

It is true that the legislator should be commended for giving entrepreneurs the opportunity to prepare their own fleets to change regulations, which is not the norm at the moment, but should not ignore the significant disadvantage of such a solution.

Given the higher prices of electric cars, driven by hydrogen or low-carbon cars, compared to the differences in the possibility of deducting depreciation, it may be more profitable for entrepreneurs to buy a cheap, used high-carbon car. This may lead to an increase in the share of such vehicles on Polish roads.

If tax law is to support the promotion of a green approach to cars and promote electromobility, it would seem much more effective to use tax incentives to acquire such vehicles rather than discourage internal combustion engines.

Not only defects

The solution proposed in the amending law is not just doubts and question marks. It is certainly to be commended to compare the limits of crediting depreciation to the cost of hydrogen-powered passenger cars with electric cars. So far, these vehicles have been treated in the same way as the others, which means they have a lower limit. Any changes are also extended, by design, to operational leasing and rental issues.

As mentioned earlier, there is also a sufficiently long time to allow companies and individuals to adapt to new solutions. And also, the fact that the Act gives the automotive market time to move freely towards healthier, low-carbon and greener cars at affordable prices.

Author: Damian Kuszewski

The author is a graduate of the Warsaw School of Economics in Finance and Accounting, and a graduate of the Faculty of Law at SWPS. From 2018 Associated with Russel Bedford Poland. His professional interests are tax law and, in particular, income taxes.