Lease and factoring – alternative ways to classify financing costs as tax-deductible expenses (Tax Alert 9/2013)
Financial thresholds for lease and factoring companies
The lease and factoring industry could face interpretation uncertainties which may be generated by the proposed amendments to the corporate income tax act, the personal income tax act and several other acts, which are scheduled to be examined at the meeting of the Council of Ministers on 13 August 2013.
Classification of financing costs as tax-deductible expenses
The proposed amendments take into account the arguments put forward by the lease and factoring industry, related to alternative ways to classify financing costs as tax-deductible expenses (Article 15c of the bill), in particular as regards a limited scope of application of the 50% rate of operating profit.
Regardless of the existing interpretation uncertainties created by the practical use of the aforementioned legislative solutions, it should be emphasized that application of such legal solutions by lease and factoring companies may still be hindered.
It should be noted that the legislator is introducing percentage thresholds which specify the entities that may use the exclusion referred to in the proposed version of Article 15c.5 of the CIT Act.
Percentage thresholds will determine the exclusion
The percentage thresholds are related to the level of revenue earned in the tax year by financial institutions which provide assets under lease agreements and by financial institutions which deliver services involving the purchase and sale of receivables. It has not been specified precisely whether the aforementioned thresholds should be set by reference to taxable or accounting revenue.
Leases and refinancing
Another practical issue which needs to be clarified is which of the percentage thresholds should be applied in the event that the lease company’s refinancing model depends strongly on disposal of a portfolio of existing lease receivables. In such a case, doubts may arise as to the source of the entity’s revenue – whether it is the lease or receivables trading operations.
Finally, it should be emphasized that if the operations of a lease/factoring company are restructured and its assets representing a significant value disposed of, it may turn out that the condition for application of the exclusion provided for by Article 15c.5 of the CIT Act has not been satisfied by the company in the tax year.
To conclude, the fact that the arguments presented by the lease and factoring industry in the social consultation have been considered, is positive. However, the application itself should be regarded as insufficient, especially as it may turn out that, in extreme cases, lease companies will not be able to use such exclusions in practice.
We recommend that the amendments introduced to the act in the legislative process should be further monitored. We will take every effort to ensure that you are kept up to date with the progress of work on the aforementioned bill.
As for now, the act in the aforementioned shape is to enter into force as of 1 January 2014.