Interest element of operating lease payments is not a borrowing cost – SAC takes the side of taxpayers

On 26 April 2022, SAC gave its judgment in case number II FSK 2197/19, upholding a taxpayer-friendly judgment of the Provincial Administrative Court in Gliwice dated 5 March 2019 in case no. I SA/Gd 1130/18 (“Lower Court’s Judgment”), where it was held that the interest element of a lease payment is not a borrowing cost as defined in Article 15c of the CIT Act.

The court made a point of noting that, for CIT Act purposes, the division of a lease payment into capital and interest applies only to finance leases under Article 17f of the CIT Act. The reason is that only in this type of lease are the parties required for tax purposes to recognise the finance charge (as opposed to repayment of capital) embedded in the lease payment as taxable income or deductible cost, as the case may be. Thus, the court held that payments for use of property which are treated as operating leases under CIT Act do not fall within the thin capitalisation restrictions in Article 15c of the CIT Act.

In contrast, the tax authorities have so far taken an unfavourable approach to this issue in their rulings. They claimed that CIT Act’s Article 15c(12) and 15c(13) applies to the interest element of lease payments in both operating leases and finance leases, the reason being that the law does not single out any type of lease to which these regulations should apply. The authorities would also argue that if the lawmakers had wanted to exclude the interest charge payable on operating leases from the ambit of the subject regulations, they would have expressed such an intention in the law (see, e.g. tax rulings dated 4 August 2020, ref. 0111-KDIB2-1.4010.233.2020.1.AT, and dated 22 December 2020, ref. 0111-KDIB1-1.4010.434.2020.1.NL).

The discussed case may start a process of change in how tax authorities approach the issue, or at least give taxpayers a greater chance to win with them in court. However, note that a written statement of reasons for the SAC’s judgment has not been published yet. The impact of the case cannot be ultimately assessed until this statement of reasons is known.

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