Leasing companies (rather) without income tax. But it could hurt the business
Although leasing companies are not included among the financial institutions excluded from the risk of paying the minimum tax, in practice the minimum tax will probably not apply to them anyway, even if their “initial” profitability is 1%. However, there is a small group of customers who, because of the minimum tax, might be interested in changing their form of financing from leasing, for example, to a loan.
One of the most unpleasant regulations of the Polish Deal is the so-called minimum (revenue) tax. Some call it a “tax on losses”, which is not a fully adequate term, but in a way captures the essence of the new tribute. Suffice it to say that this tax can be paid by hospitals or municipal companies. Although the tax is unlikely to threaten leasing companies – in the sense that most lessors are unlikely to pay it – in general, the tax is certainly not beneficial for the business.
Minimum tax – what’s the point?
The issue is the new Article 24ca of the CIT Law. It introduces the taxation of entities (CIT taxpayers only) whose profitability (calculated as the share of income in revenue) is at 1% or less. Then, in a nutshell, such entities will pay tax not on taxable income, but (mainly) on their revenues. This tax will amount to 0.4% of revenue. This is because the tax base is mainly 4% of revenue, and the tax rate is 10%.
However, the Act provides several important exemptions. First of all – for entities that start a business, certain groups of companies, and especially for entities that do not have shares in other companies themselves, and are owned exclusively by natural persons. In practice, most entrepreneurs with Polish capital are able to “escape” the risk of paying the minimum tax – especially since it is most often possible to restructure the structure so that the tax does not apply to them. Why only Polish entrepreneurs? Because foreign companies usually operate on the basis of a holding company or investment fund, and entering a foreign market usually requires a large amount of capital, and small or medium-sized companies owned by individuals rarely have such opportunity. Of course, this raises the question of whether such a regulation does not discriminate against holding companies and, consequently, does not violate the freedoms of the EU internal market… Financial institutions such as insurers or banks are also excluded from the minimum tax. Unfortunately, leasing companies were not included.
For customers of leasing companies that are CIT taxpayers, who do not qualify for any exemption, and whose profitability is close to 1%, changing the financing formula from leasing to, for example, a loan, could prove to be a savior from the minimum tax. In practice, however, the pool of customers who might be interested in changing their financing form because of the new tax should be rather small.
Fortunately, Article 24ca paragraph 2 of the CIT Law comes to the rescue of leasing companies. This provision stipulates that, for the purposes of calculating loss and income share (profitability), costs arising from the acquisition, production or improvement of fixed assets that were included in the tax year as tax expenses, including through depreciation and amortization, shall not be taken into account.
This means that for the purpose of calculating profitability, depreciation charges on purchased fixed assets are excluded from the tax result. So, if, for example, a leasing company generated revenue of PLN 100 million and income of PLN 1 million, its “preliminary” profitability will be 1%. However, if this company’s tax depreciation expenses amounted to PLN 20 million, its profitability will rise to PLN 21 million, or 21%, for the purposes of applying the minimum tax provisions. Then such an entity will not pay minimum tax.
A double-edged sword
So it seems that even in bad times, leasing companies, excluding amortization from their results, should achieve enough profitability that the minimum tax will not affect them. However, it is worth doing a test in this area on the basis of financial data from recent years.
So why doesn’t this tax benefit the industry? Well, because the ability to exclude amortization does not apply to accounting amortization (and such is usually generated by operating leases) or amortization in financial leases, since only write-offs on “own” fixed assets are relevant. What does this mean? For customers of leasing companies that are CIT taxpayers, who do not qualify for any exclusion, and whose profitability is close to 1%, changing the financing formula from leasing to, for example, a loan, can prove to be a salvation from the minimum tax.
However, this problem does not seem to have plunged leasing as such. Why? Firstly, arguably the majority of companies are those that are excluded from the minimum tax due to their simple structure. Secondly, of those companies that will not benefit from the exemptions, the change in the financing formula may be attractive only to those that have profitability in the neighborhood of 1% and, on top of that, the cost of using fixed assets is significant with them. If the company is at a sustained loss or has a permanently high profitability, the abandonment of leasing will not help it at all. Likewise, if the costs of using assets do not make up a significant share of the company’s overall costs.
Therefore, in practice, the group of customers who might be interested in changing their form of financing due to the minimum tax should be rather small. Unfortunately, a lot of myths have grown up around the Polish Deal, and there is a risk that some customers will abandon leasing due to ignorance or over-prevention. Therefore, it is very important to equip sales departments with the right knowledge – so that the resulting misinformation can be clarified at the front line as much as possible.