Polish Deal – a blow to the leasing industry

On 15 November this year, the President signed a law introducing tax changes as part of the so-called Polish Deal. Among the adopted provisions was a regulation altering the previous rules regarding car leasing, buyouts, and subsequent sales. Importantly, although the changes take effect only from January 2022, the new regulations will also impact entrepreneurs who concluded leasing agreements earlier and do not manage to complete the buyout before then.

Thus, the government’s announcements published in July on the gov.pl website, where the Ministry of Finance stated:

“Among other things, the practice of taking cars on company leasing and, after paying the lease instalments, buying them out into private ownership will be limited. This practice borders on illegality; in other EU countries, only companies can buy out the car.

The new regulations will also prevent bringing overvalued assets into the company. There is a dishonest practice of buying, for example, a new car and after several years of private use, contributing it to the company. The rules currently allow amortisation of assets brought into the company at the purchase price, not their value at the time of contribution. This reduces tax liabilities by means of used cars and electronics. We will amend the regulations so that from next year depreciation deductions will be made based on the market value at the time the asset is brought into the company, not the “historical” purchase price.”

Double tax obligation

From January 2022, an entrepreneur wishing to buy out a car and then transfer it to private assets will be obliged to pay both income tax and VAT. Moreover, the sale of a car bought out from leasing for private use will be treated as income from business activity and taxed accordingly. But that is not all — if the car was bought into the company’s assets and the income from its sale is accounted for in the company’s PIT tax returns, the transaction may also be subject to VAT.

The issue of VAT due on the sale of a car bought out privately remains uncertain. Until now, tax authorities maintained that no VAT was payable on the sale of an asset from private assets. However, there is a risk that the tax office may change its stance, arguing that since the income from the sale should be included in PIT business activity declarations, the sale should also be subject to VAT (if the taxpayer had the right to deduct VAT upon buyout).

The new regulations provide for a possible exemption from tax on the sale of the car, but only if the transaction occurs after five years (counting from the year following the payment of the last instalment). Thus, the period after which the sale ceases to be taxed has been significantly extended (previously it was 6 months). Furthermore, VAT paid on the buyout of the car will no longer be calculated on the buyout value (last instalment), which was often only a fraction of the vehicle’s value. The new regulations mean that for purchases of vehicles into private assets, VAT will be paid on the real market value of the vehicle.

What about existing leasing agreements?

The Polish Deal regulations will apply to all buyouts made from 1 January 2022 onwards. According to Article 51 of the amending act, the new rules apply to assets acquired after 31 December 2021, so the key date is the buyout date. A leasing agreement concluded before 1 January 2022 will, as of the new year, be subject to the new rules. To be able to buy out a car privately under the old terms, the buyout must be completed before the end of December this year.

To avoid paying tax on the sale, an entrepreneur who has already entered into a leasing agreement with a buyout planned for 2022 will need to amend the contract to buy out the car, for example, on 20 December. Then they can sell it after six months without taxation.

Attempt to circumvent the rules

There is a way to shorten the 5-year waiting period for tax-free sale of a car bought out from leasing. After buyout, the vehicle can be gifted to a close person belonging to the so-called zero tax group, fully exempt from donation tax under the Inheritance and Donation Tax Act. Those eligible for exemption—and thus potential recipients of the gift—are: spouse, descendants, ascendants, siblings, stepfather, and stepmother. Such a recipient can sell the car without taxation within the usual 6 months from acquisition. It is unclear how the tax office will respond to this practice; a clear position will likely only emerge through court rulings.

Another blow to sole proprietorships

These changes effectively eliminate the benefit of privately buying out leased assets from January 2022. It is worth noting that the possibility of buying out assets into the entrepreneur’s private assets and selling them tax-free was one of the biggest advantages of running a sole proprietorship. Given the other regulations introduced under the Polish Deal, it is highly likely that running a business as a sole trader may become unprofitable from next year. In forthcoming articles dedicated to New Year’s changes, we will advise how entrepreneurs can adapt to the new legal reality and recommend alternative ways to conduct business.