Apart from private users and enterprises using cars for their day-to-day business activities, numerous transportation companies create a vast demand for cars, which in the years of boom in mid-nineties was hardly satisfied by the country's automotive industry.
Tax treatment: Passenger cars vs. trucks
One of the most important issues in relation to Polish tax implications of using a car for business activities is classification of the car as a passenger car or a truck.
Although this issue may sound strange - since the difference between a passenger car and a truck seems to be obvious - it is not entirely so under the Polish regulations.
Polish tax law provides for different regulations depending on the fact, whether a car can be classified as a 'passenger car' or a 'truck'.
However, the term 'truck' does not mean that a specific car must be a large-sized lorry - some cars, which are commonly recognised as passenger cars, may still be treated as 'trucks' provided that certain technical and formal conditions are met. Among others, allowed payload of a truck must exceed 500 kg.
A truck should also be certified with 'Homologacja' (a document confirming the type of a given car) issued by a producer or an importer in compliance with specific technical regulations.
Thus, it is very common for the Polish companies to use passenger cars (in a common understanding), formally registered as trucks.
It should be noted, however, that the possibility to recognise passenger vehicles as trucks has been severely limited in the past and may be further limited in the near future.
Nevertheless, under the currently binding regulations, use of a car registered as a 'truck' brings certain tax benefits, or more precisely speaking, allows to avoid tax drawbacks applicable to a passenger car.
Namely, a taxpayer using a passenger car for its business purposes must take into account that:
Currently, the maximum rate per one kilometre amounts to approx. € 0.17. The full deductibility of the costs in question is allowed only if the car is used under the leasing agreement, as specifically defined in the Corporate Income Tax Law.
The above drawbacks do not apply in case of using cars registered as a truck. In such case:
Use of employees' cars for business purposes
When employees use their own cars for business purposes of their employer, they may obtain reimbursement of costs from the employer.
The reimbursement received from the employer is not recognised as the employee's taxable revenue up to a certain amount, calculated as a number of kilometres travelled for business purposes multiplied with a rate per one kilometre (maximum of €0.17). For the employer the reimbursement up to this amount constitutes a tax deductible cost.
Use of employer's cars for private purposes
In the opposite situation, i.e where an employee uses a company's car for his private purposes, it is considered to be his benefit in kind which should be recognised as a taxable revenue.
It should be noted, however, that the Polish Personal Income Tax regulations do not provide for the specific method of calculation of the value of such benefit in kind. Therefore, in practice it is very hard to value it precisely and thus various methods are applied by the taxpayers.
Expenditures on acquisition of the car are not tax deductible immediately, but can be written-off by way of tax depreciation by the owner of the car (or by the lessee in case of a finance lease contract).
The base for depreciation is the initial value of the car. Generally speaking, the annual straight-line depreciation rates set out in the tax regulations are: 20% for cars, vans and busses and 14% for trucks and trailers.
Furthermore, in addition to the straight-line method, the double declining balance depreciation method may be applied in Poland for tax purposes on certain types of assets, excluding passenger cars.
This means that the straight-line rate is doubled and applied to the net book value of assets rather than to the original cost. Accelerated depreciation is also available for assets used more intensively than average.
For the “second-hand” cars - i.e those used by another entity for the period of at least six months prior to their acquisition, the taxpayers may apply the individual depreciation rates. The period of depreciation, however, should not be shorter than 30 months.
In the case of passenger cars, the base for depreciation is the value of the vehicle increased by the input VAT paid on its purchase (because this VAT is not recoverable under the VAT regulations). We have already mentioned limitations concerning the allowed depreciation deductions of passenger cars for tax purposes.
The portion of depreciation write-off of passenger cars, representing the car's value in excess of the PLN equivalent of €20,000 is not allowed as a deduction for tax purposes.
Leasing of cars
For many years after the transformation of the Polish economical system, leasing agreements were not regulated in the civil, tax and accounting regulations. Although this situation was not favourable to run a leasing business, many leasing companies developed their operations rapidly in mid-nineties.
Lack of the legal framework for leasing also led to numerous disputes between taxpayers and tax authorities, since the latter often viewed the leasing transactions as aimed at artificial increase of tax deductible costs.
This situation has changed since the relevant provisions defining leasing agreement and its implications were introduced to the Polish Civil Code (December 2000), tax regulations (October 2001) and the Accounting Act (January 2002).
With the stabilised legal environment the leasing sector may be developing further, with a big potential for further growth, although recent years have not been very successful.
It is notable that according to the information provided by the Union of Polish Leasing Enterprises, lease of cars constituted almost 68% of all leasing transactions concluded in the year 2002. The number of cars financed by way of leasing should increase in the future, since the lease of fleets becomes more and more popular.
Polish income tax regulations
As noted, the specific tax rules relating to leasing activities are in force as of October 2001. These rules relate only to contracts concluded as from this date. Lease agreements concluded before this date are subject to the previous, not very favourable regulations.
The current tax regulations refer to the definition of a lease contract provided in the amended Civil Code and to related concepts of a 'financing party' (i.e. the lessor) and the 'user' (i.e. lessee).
The lease contract is defined as an agreement defined in the Civil Code, as well as any other agreement, under which the financing party gives to the user tangible or intangible assets subject to depreciation (or land) for use.
The tax regulations stipulate different tax qualification of lease contracts depending on the duration of time for which they are concluded - i.e. they basically draw a line between contracts that are concluded for more or less than 40% of the standard depreciation period of movable assets.
Operating lease of cars
If a lease contract meets the conditions set out below, namely: (a) It has been concluded for a specified period of time, constituting at least 40% of the standard depreciation time
(b) The total amount of payments determined in the contract, net of VAT, corresponds at least to the initial value of the leased object.
Then during the basic period of the lease contract the lessor will include lease payments in its taxable revenues in the full amount and will depreciate the leased asset for tax purposes. For the lessee, in turn, the entire amount of lease payments will constitute tax deductible costs.
Finance lease of cars
On the other hand, if the lease contract:
(a) Has been concluded for a specified period of time (no limit has been set)
(b) The total amount of payments determined in the contract, net of VAT, corresponds at least to the initial value of the leased object
(c) Defines that during the period of the lease the leased object will be depreciated by the lessee.
Then the portion of lease payments which constitutes repayment of the initial value of the leased object will not be included in the lessor's revenues or in the tax deductible costs of the lessee.
If the amount of repayment of the leased object's value included in the lease payments has not been set out in the contract, it will be determined proportionally to the duration of the contract.
The lessee will include in his tax deductible costs only the so-called 'interest element' of lease payments (which will at the same time constitute revenue for the financing party), as well as depreciation charges.
Tax on Transportation means
Trucks and tractors with overall capacity exceeding 3.5 tonnes, trailers with overall capacity over 7 tonnes and buses are subject to tax on transportation means. The tax is levied on legal owners of the aforementioned vehicles and ranges between €145 and €550, depending on a given vehicle and its capacity. Tax is payable in two equal instalments - the first one by 15th February and the second one by 15th September of a given calendar year.
Car registration fee
Registration fee is levied on all motor vehicles in order to allow them for use. The fee is payable by the legal owner of the vehicle when the vehicle is registered in the local authorities and is granted registration card and plates.
Registration fees are fixed and amount to approx. €15 for registration card and approx. €20 - €230 for plates.
It should be noted that the information presented above is based on the Polish regulations in force at the moment of preparing this article (September 2003).
In the light of the Polish accession to the European Union in May 2004, which requires that the Polish law is compliant with the EU legislation, numerous changes in the Polish legislation, including tax law, are projected. At the current, early stages of the legislative process, no final solutions are known.