What can we do at the end of a car lease contract?

At the end of a car lease’s term, a company can decide either to end the lease contract without buying the car, to buy the car and then use it or to buy the car and then sell it.

1. Ending the leasing

This decision does not involve any tax consequences. A company can pay the last invoice and end up the cooperation with the lessor if a lease agreement includes such an option.

2. Purchasing the car at the end of the car lease’s term

Most of the companies decide on buying the car at the end of the car lease’s term.

2.1. CIT/PIT – calculating the initial value of a fixed asset and the rate of depreciation

According to income tax regulations, an initial value of a fixed asset is the prize of its acquisition, i.e. the amount due of the seller, along with the costs connected with the purchase, calculated up to the day of providing for use. Theoretically, the amount on a purchase invoice equals the initial value of a fixed asset but…

Often the prize of an acquired asset is smaller than its market prize. It results from the fact that prizes of fixed assets are already partly included in leasing installments. When leasing periods are short and there is a considerable difference between the market value and the prize of the redemption, it is best to analyze precisely so called “hypothetical net value”. Therefore, it is possible to specify that there was no tax income connected with the redemption of the leased asset for the prize smaller than the market prize.

We can classify a purchased fixed asset as “used” and apply an accelerated rate of depreciation. If the value of the acquisition does not exceed 3 500 PLN, we can depreciate it once – in the month of providing for use.

If the value of the purchase exceeds this amount, the minimal tax depreciation’s duration is 2,5 years.

2.2. Is it possible to deduct VAT in this situation? How much VAT can we deduct?

Since deducting VAT (amounting to 60% of the tax amount in the invoice, not more than 6 000 PLN) from rental payments during a lease agreement does not constitute a delivery of goods within the meaning of the Act on VAT (paragraph 7 passage 1 point 2) but a provision of services that consists in paid providing for use of the used car to the lessee, the same regulations apply after buying the car and we can deduct VAT then.

Buying a leased object constitutes a purchase-sale contract, which is distinct from a lease agreement. Therefore, there are two separate transactions with two different limits on VAT deduction.

3. Selling the car purchased after the termination of the lease agreement

3.1. Profit tax

The profit from the sale of the car is calculated as the value of sales minus the purchase cost minus depreciation deductions made from the moment the car enters into fixed assets’ register. If the car was amortized once, we will have to pay the tax from the sales value.

3.2. Exemption from VAT – selling used cars

If you want to learn about the possibility to be exempt from VAT when you sell a leased car, you should know first for how many months the car was used after buying it from the lessor. The fact that you used it on the basis of the lease agreement is of small importance. The important thing is for how many months you have used the car as a legal owner before selling it. If there are less than 6 months between the date of purchase (and of entering into fixed assets’ register) and the date of sale – you cannot be exempt from VAT.

If the bought car is treated as a “used fixed asset”, the sale invoice of the car, from which value we deducted VAT when we purchased it from the lessor, will be exempt from VAT.

However, there is another aspect: a correction of VAT that was deducted when buying the car. If less than 5 years passed from the moment of buying the car to the moment of selling it, and the value of the car was higher than 15 000 PLN, the amount deducted when buying the car will have to be corrected. The deduction’s correction should be proportional to the number of years the car was used, i.e. 1/5 of the VAT deducted earlier for each year before the end of 5 years’ time. This period is counted in calendar years – the first year is the year of providing the car for use, regardless of the fact whether it happened at the beginning or at the end of the year.

If the value of the car amounted to less than 15 000 PLN, and if the car was sold after less than 12 months from the day of entering to the fixed assets’ register, the correction is proportional to the number of months which are left to the 12 months’ time of usage.

The chart below presents the discussed cases of VAT correction: