Milewska Legal

Leasing – basic information about leasing agreement

23 February 2023

Nowadays we can observe a general interest of entrepreneurs in leasing as a form of financing investments – such as e.g. a car. What is leasing? How is it different from a lease? What is a financial leasing and what is an operating leasing?

Leasing agreement – what it is?

Leasing agreement is regulated in the polish Civil Code. Under this agreement the financing party (the leasing provider) purchases an item from specified vendor (e.g. car, IT hardware, machine) and submits it for use of the user (the leasing receiver) for remuneration.

In other words, the leasing agreement is a contract which enables the use of an item (e.g. a car, a computer, a printer) without the necessity of bearing the full cost of a sale upfront (which is incurred by the leasing provider).

 The cost of the item is staggered through the leasing instalments which also include the remuneration of the leasing provider. It is thus a form of external funding thanks to which the financial burden of the leasing receiver connected to the purchase of items necessary to undertake business is relatively small, and the total cost is spread over time and can be covered by the income.

Main features of the leasing agreement

The subject of the leasing agreement can be either movable or immovable. The leasing agreement is executed for a definite period of time in a written form otherwise being null and void. However if the agreement concerns real estate – in the event that it includes a possibility of a transfer of the ownership from the leasing provider to the leasing receiver, it should be executed in a form of a notarial deed at least in respect of the ownership option.

 You shall remember that throughout the whole duration of the leasing agreement the ownership lies with the leasing provider. The lease receiver is entitled to use the item, but at the same time they have a responsibility to maintain the item in a good condition. It means, among others, that the leasing receiver bears the costs of the maintenance and repairs (e.g. periodic vehicle checks). However they are not authorised to make major adjustments or modifications of the item.

It has important practical consequences – e.g. in the event of a total loss in a car under leasing agreement (so when repairing a car after an accident is financially unprofitable), the financing party (the leasing provider) shall be entitled to compensation from insurance (despite the fact that it is the leasing receiver that will not be able to use the car). What is more – in such an event the leasing agreement is terminated, and the leasing provider is entitled to demand payment due to future and not paid leasing instalments from the leasing receiver.

Leasing agreement versus long-term lease agreement and instalment sale agreement

From the legal point of view, objectives of a leasing agreement are similar to those of a long-term lease agreement or an instalment sale agreement. Similarity to long-term lease is visible i.e. in the obligation of paying monthly instalments due to use of the object (in case of a lease – it will be rent, in case of a leasing – it will be leasing instalment). In both of the cases the ownership of the used item does not lie with the user, and lies with – as relevant, the lease provider or the lessor. For the user, the biggest differences between these agreement are:

The familiarity between leasing agreement and instalment sale agreement  is visible i.e. in the fact, that in both of the cases the user is paying off the full price of the item throughout the duration of the agreement. In both of the cases there is one price/remuneration (which is known in advance) which is split into instalments and paid off as such.

The biggest difference between leasing agreement and instalment sale agreement is lack of transfer of ownership to the leasing receiver of the used item in the moment of conclusion of the agreement. In the event of the instalment sale, the user of the item becomes the owner of such item henceforth (despite the fact of paying the price in instalments). In case of leasing, buyout is possible only after the end of the agreement.

Types of leasing agreements

In the context of leasing agreements concluded between entrepreneurs we can differentiate between, among others, operating leasing agreement and financial leasing agreement.

Operating leasing agreement is characterized by the fact, that the subject of the leasing agreement is in the fixed assets record of the financing party. It is directly connected to the possibility of the financing party to depreciate. However, the leasing receiver is obliged to incur costs connected to the use of the subject of the agreement – including but not limited to insurance and repair. Costs of the leasing agreement – in this case both: costs incurred and the leasing instalment – are qualified as the tax deductible cost. In the context of taxes – operating leasing agreement is taxed in the amount of 23% on each leasing instalment and is subjected to VAT tax deduction. What is more, operating leasing agreement cannot be concluded for a period of time shorter that 40% of so called statutory deprecation period of the leasing agreement – which arises from the Act on Personal Income Tax. The minimal duration of a leasing agreement differs depending on the subject of the agreement. In case of a car, such a period will amount to 2 years.

Financial leasing agreement is distinguishable because of the fact, that the subject of the agreement is assigned to fixed assets record of the leasing receiver – so they are entitled to depreciate. However only the interest on leasing instalments can be deducted from VAT tax. In this kind of agreements provisions resulting in immediate transfer of ownership upon the end of duration of the agreement are commonly used. In the context of taxes – the rate of VAT tax of the financial leasing is in the same amount as the subject of the agreement. VAT tax is payable in advance for the whole duration of the agreement.

Aleksandra Kostrzewa                                                          Mateusz Dominiak

 paralegal                                                                                attorney

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