General rulings on tax effects of changes to leasing agreements, training courses arranged by professional associations, and sale of debts
On 15 February 2021, the Ministry of Finance issued thee general rulings concerning income taxes. The rulings apply to:
- the scope of permitted modification of leasing agreements and determination of income earned by the finance provider from sale of the leased object to a third party during the effective term of the agreement,
- taxation with personal income tax of training courses attended by member of professional associations and arranged by the associations,
- the rules for determining deductible costs of sale of own debts under a factoring agreement.
Presented below is a brief summary of each of the rulings.
Modification of provisions of leasing agreements and determination of income earned by the finance provider from sale of the leased object to a third party during the effective term of the agreement
The first ruling published on 15 February 2021 presents the position of the Minister of Finance regarding interpretation of the expression “other contractual provisions” used in Art. 17a(2) of the CIT Act (Art. 23a(2) of the PIT Act). Accurate understanding of this term is necessary to determine which changes to the leasing agreement do not affect applicability of Art. 17c or Art. 17g of the CIT Act (Art. 23c or Art. 23g of the PIT Act) which govern settlement by the finance provider of transactions of purchase of the leased object after the lease ends.
In this context, the Minister of Finance considered that changes to the leasing agreement which do not lead to it being recognized as operating lease or financial lease are not relevant (however, a leasing agreement of one type must not be transformed into a leasing agreement of another type). Moreover, the Minister of Finance confirmed that a change of the parties to the agreement is not to be considered such a change. The ruling indicates that, from the perspective of applicability of Art. 17c or Art. 17g of the CIT Act (Art. 23c or Art. 23g of the PIT Act), only those changes in the leasing agreement are crucial which may determine its classification according to the Act (so primarily its minimum duration, its conclusion for a fixed term, the sum of the fees agreed under the leasing agreement).
In the ruling, the Minister of Finance also set out the rules for determining income in case of sale of the leased object during the effective term of the leasing agreement by the finance provider to an entity other than the user. According to the ruling, in this case the income of the finance provider is the value expressed by the price specified in the agreement, and if the selling price is at the level of the principal amount unpaid by the user it should be assumed that it is consistent with the market value.
Taxation of training courses attended by members of a professional association, arranged by the association
In the next general ruling published on 15 February 2021, the Minister of Finance stated that a member of a professional association does not receive a gratuitous performance under the PIT regulations by attending training arranged by the association.
The Minister of Finance indicated that a gratuitous performance occurs if one entity receives a specific benefit while making no reciprocal performance.
The Minister of Finance is of the opinion that these requirements are not satisfied for members of professional associations (physicians, midwives, nurses, lawyers, etc.). They are obliged to pay a periodic membership fee. The income from the fees is used to cover the costs of statutory activities of the association. The obligations of the association, on the other hand, include delivery of training to its members.
This means that members of the professional association and the association itself are bound by a legal relationship, and the benefits gained therefrom may not be considered a gratuitous performance.
The Minister of Finance emphasized that the above conclusions remain valid also in a situation where the training is conducted by a third party, and the professional association reimburses its members for the costs thereof.
Rules for establishing deductible costs relating to sale of own debts under a factoring agreement
In the last ruling issued on 15 February 2021, the Minister of Finance refers to the discrepancies in the decisions issued by tax authorities in respect of assignments of own debts under factoring agreements. In particular this applies to the manner of determining deductible costs by taxpayers.
In the individual rulings issued to date, the tax authorities limited sellers’ right to recognize deductible costs by indicating that they could only exercise this right if they incurred a loss in the transaction of sale of their own debt, or by indicating that only the net value of the debt could be recognized as a deductible cost.
Such discrepancies resulted primarily from doubts regarding interpretation of Art. 16(1)(39) of the CIT Act, which excludes the possibility to recognize a loss from sale of debt for consideration as a deductible cost, also in the way specified in Art. 12(1)(7), except for a debt or a part thereof which was previously recognized as income due – up to the value previously recognized in this way.
In the general ruling, the Minister of Finance adopted an interpretation favourable for taxpayers, and indicated that the seller, by selling the debt to the factor at 100% of its nominal value gross, may recognize the value of the cash debt sold in its full amount including VAT as deductible costs. Only a “loss”, i.e. the difference between the “gross” value of a debt and the amount of income from sale (assignment) of the debt can be excluded from deductible costs.
In the summary, the Minister of Finance indicates that if an own debt is sold under a factoring agreement, the rules for determining deductible costs should be as follows:
- The existence and value of the costs should be established, within the meaning of Art. 15(1) – generally, the cost consists of the nominal gross value of the debt sold.
- The loss from sale of the debt should be established.
- Where no loss has arisen, the cost is classified as deductible in its entirety.
- If a loss has arisen and the debt sold was recognized as income, the ratio of the loss to the income should be established.
- If the loss is higher than the income, the excess should be deducted from the cost incurred and the reduced amount of the income constitutes the deductible cost.
- If the loss is lower than or equal to the income, the cost incurred is classified as deductible in its entirety.
Should you have any questions or doubts regarding the issues discussed here, we are ready to assist you.