Fiscally yours

In keeping with general principles, under operational leasing all leasing instalments constitute a revenue-generating cost for the lessee, while tax depreciation is accounted for by the lessor. The leasing of used real estate (for example for a period of at least 60 months) brings with it particular advantages, which to a large measure explains the growth in the popularity of sale-and-leaseback transactions and the leasing of lessor-financed facilities (sometimes referred to as investment leasing).

Appropriate qualification

For a transaction to be classified as operational leasing from the fiscal perspective, it has to meet certain criteria. For example, the lease absolutely has to be drawn up for a fixed period of time, and certainly no shorter than 10 years in the case of property subject to depreciation. For comparison, with intangible assets subject to depreciation, this has to be a period equal to 40% of the normative depreciation schedule (in line with depreciation rates appended to income tax regulations). In addition, total leasing instalments and the price (without VAT) for which the lessee can acquire the lease property following termination must at least equal its initial value. Although an operational lease property can be in the form of buildings, structures or separate premises, from the "tax point of view" there is no such option with land, as ownership or perpetual usufruct of land is not subject to depreciation. All this has an unusual consequence. In spite of the fact that from the civil law perspective a leasing transaction is a single object, for example a property comprising of a plot of land and a building, for fiscal purposes, the land is subject to a different regime to the building. With the building, the parties can apply fiscal regulations related to operational leasing, but with the land they have to abide by a different regime, somewhat similar in its consequences to that of financial leasing. Fortunately, the evaluating practice is aimed at the uniform treatment of the leasing of the building and the leasing of the land on which such a building is located.

Surely some mistake?

Unfortunately, fiscal regulations concerning the leasing of real estate can give rise to a number of different interpretations. The best example of this is the regulation concerning real estate in perpetual usufruct. The wording of the regulations would seem to indicate that such land cannot be the subject of a lease agreement from the fiscal point of view. In practice however, application of the 'rational legislator rule' means it is often assumed that this provision should be viewed as an unintended, and even obvious mistake.

Hypothetical net value

In spite of a number of shortcomings, Polish tax regulations should generally be viewed in a positive light. One fundamental advantage is the possibility of buyback by the lessee of the lease object at a price below market value. This is particularly important when it comes to the leasing of real estate, where market value increases over time. Nevertheless, in order to apply the above solution, the price of the real estate has to be consistent with what is termed "hypothetical net value", which means its initial value less digressive depreciation using a ratio of 3.

Leasing mix

In order to maximise the tax benefits, leasing mixes need to be used at times. At the initial stage, they are in the nature of an operational lease, and end up in the final stage as a financial lease. Very often, these transactions require the drawing up of rather complicated legal structures. With this in mind, recourse should be made to reputable leasing firms, as they have the knowledge and experience to structure transactions properly and then implement them in a manner that will be fiscally safe for the lessee.

Upping the rating

Operational leasing is becoming increasingly attractive for businesses due to the balance sheet benefits which are available. These arise primarily from removing real estate from the balance sheet (and replacing it with a liquid asset in the form of cash) and from the off-balance sheet nature of this type of leasing. Balance sheet "thinning" is particularly interesting for large corporate groups (including listed companies) for the purpose of smartening up their financial indicators and ratios.

Only for the chosen few

In practice, preparing and concluding a real estate leasing transaction as an operational lease is not straightforward. In addition to Polish accounting standards, such transactions are very often viewed in terms of International Accounting Standards, in particular IAS 17, which itself has given rise to many articles and commentaries. In keeping with its principles, if the greater real estate risk, which is usually incurred by its owner, is actually incurred by the lessee, then the transaction is to be treated as a financial lease. Nonetheless, with back-up from a seasoned leasing firm and auditors familiar with the ins and outs of each segment of the real estate market, it is possible to successfully draw up an operational lease transaction without giving up its loan advantages. The decisive element in the success of any such undertaking is often the necessity for the lessor to take over the risk related to the sale of the real estate following termination of the lease. Given that their activities tend towards loan ventures, not many leasing firms are ready to take on this type of risk. When they do, it is usually only in relation to a highly attractive property.

Anna Tomowicz

and Tomasz Dąbrowski

Lawyers for Salans, Warsaw office