Taxation and legal aspects of leasing

Tax issues associated with leasing are dealt with in these legal regulations: Income Tax Act No. 586/1992 Coll., Value Added Tax Act No. 235/2004 Coll., and Road Tax Act No. 16/1993 Coll.

1. Income tax

Direct taxes associated with leasing transactions are fully dealt with in Act No. 586/1992 Coll., on income tax, as amended. This Act regulates the inclusion of various specific forms of expenditures in the tax-deductible expenses, both from the point of view of the lessor and the lessee.

As a finance lease is regarded only such a contractual relationship which stipulates the right or obligation to purchase the lease asset, that is title to the asset passes to the lessee at lease end.

The fundamental condition of a finance lease for the expenditures of the lessee as well as the lessor to become deductible is that the lease term must be at least the statutory depreciation period under §30, section 1, of the Income Tax Act.

Throughout the lease, the leased asset is included in the lessor´s assets, who charges depreciation, using straight-line method of depreciation or accelerated depreciation method. For expenditures to be tax-deductible for the lessee, there is a condition that the purchase price of the asset at lease end is not be higher than the residual value calculated based on the the asset´s capitalized cost recorded in the owner´s accounts, which the asset would have had as at the resale date using straight-line method of depreciation, but on condition that the asset has not already been written off.

If all these condition are met, the lessee may claim lease payments as tax-deductible expenditures at an even rate over the lease term.

An operating lease may basically provide for any lease term. At lease end, the lessee may or may not purchase the leased asset.

In the event of an operating lease, the Income Tax Act makes the lessee´s purchase of the leased asset only conditional on the asset´s resale price not being lower than the residual value calculated on the basis of the owner´s (the lessor´s) capitalized cost of the asset over the time it could have been depreciated.

2. Value-added tax

Application of VAT in leasing is governed by the relevant provisions of Act No. 235/2004 Coll., on value-added tax, as amended.

As of 1 January 2009, the VAT regime for leasing depends on provisions in the lease which govern the lessee´s right or obligation to purchase the leased asset.

In the even that the lease provides for the lessee´s right to purchase the leased asset, the taxable supply is classed as a supply of services.

The taxable supply is then individual lease payments, on each of which the leasing company pays VAT and the lessee claims this VAT as at the date of taxable supply for each payment. The payment schedule serves as a tax document.

In the event of leases which provide for an obligation to purchase the leased asset, the taxable supply is classed as a supply of services where VAT is to be paid or can be claimed in full, as at the day the lessee´s right use the leased asset arises. The leasing company will issue a standard tax document in respect of the full leasing price.

The lessee, if a VAT payer, can always claim VAT, regardless of whether the lease provides for a right or obligation to purchase the leases asset.

3. Road tax

Act No. 16/1993 Coll., on road tax, as amended, provides that the road-tax payer is the person stated in the technical certificate as the operator of the vehicle.

In the event of a finance lease, the lessee is usually stated as the operator of the vehicle, so the lessee is obligated to pay the road tax, while the vehicle is registered as the lessor´s property. In the event of an operating lease, the operator of the vehicle is the owner. Therefore, the road tax payer is usually the leasing company.

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