Early termination of a leasing contract and PIT and VAT

The leasing agreement is one of the most popular forms of financing. It allows the use of expensive assets without the need for their immediate purchase. Shortening the lease agreement may seem like an attractive solution, especially in a rapidly changing business environment. It can allow a company to acquire ownership of the leased item more quickly or terminate a contract that is no longer beneficial. But what changes in settlements when a lease agreement is shortened?

To qualify as an operating lease, the agreement must meet the conditions specified in the law. According to Article 23b(1) of the Personal Income Tax Act, the fees specified in the lease agreement, incurred by the lessee during the basic term of the agreement for the use of fixed assets and intangible assets, constitute revenue for the lessor and tax-deductible costs for the lessee, provided that:

1. The lease agreement, if the lessee is not an individual not conducting business activity, was concluded for a specified period of at least 40% of the standard depreciation period for movables and intangible assets, or at least 5 years in the case of real estate subject to depreciation.

2. The lease agreement, if the lessee is an individual not conducting business activity, was concluded for a specified period.

3. The sum of fees specified in the lease agreement (excluding VAT) corresponds to at least the initial value of the fixed assets or intangible assets, and if the leased asset was previously leased, the sum of fees corresponds to its market value on the date of the next lease agreement, in accordance with Article 19 of the Act.

If the lease agreement meets the above conditions and the person signing the agreement does not benefit from the exemptions listed in Article 23b(2) of the PIT Act, all costs related to the leased item can be classified as tax-deductible. This means that the lessee may include all leasing-related expenses as business costs. Moreover, the taxpayer is not required to reverse previously recognized costs or adjust income – even if the entrepreneur decides to close the business.

The early termination of a lease agreement does not result in negative VAT consequences – no adjustments are required. This position has been repeatedly confirmed in numerous interpretations issued by the Director of the National Tax Information Office, for example in the letter dated 21 September 2022 (0111-KDIB3-1.4012.492.2022.2.ICZ). It was clearly stated that under the VAT Act, an operating lease is a service (Article 8 of the Act). The lessee, receiving invoices documenting the operating lease, obtains the right to use the car (thus receives a service), not ownership (a good). Expenses related to the use of a leased vehicle are deducted on an ongoing basis, not as a one-time deduction “in advance” as with ownership purchase, allowing for continuous deduction verification.

At the end of the operating lease agreement, there is no need to adjust the VAT deduction on lease payments for the periods during which the vehicle was used in business activity. The buyout of the vehicle after the end of the lease agreement is a separate transaction – a supply of goods, not related to the lease agreement itself.

Therefore, early termination of an operating lease agreement does not require adjusting input VAT on lease instalments paid during the lease – VAT settlements remain unaffected.

Shortening the lease agreement, provided that the appropriate conditions are met, may sometimes offer benefits without tax complications: it does not require adjusting previously incurred costs or PIT and VAT settlements. If you have any questions regarding tax matters, please feel free to contact us, also remotely: https://atl-law.pl/prawo-podatkowe/