SAC confirms that operating lease payments do not qualify as borrowing costs

A written statement of reasons has recently been published for Supreme Administrative Court’s (SAC’s) judgment of 26 April 2022 in case no. II FSK 2197/19, affirming a taxpayer-friendly judgement of the lower court (Provincial Administrative Court in Gdańsk) dated 5 March 2019 (case no. I SA/Gd 1130/18) on the treatment of the interest element in an operating lease payment as a borrowing cost.

SAC addressed that issue in its statement of reasons, upholding the lower court’s position, which was that thin capitalisation restrictions under Article 15c of the CIT Act do not apply to payments for use of tangible property which are treated as operating leases by the CIT Act.

The higher court said that it would be an artificial attempt to try and distinguish any “interest element of a lease payment” made under leasing arrangements which tax law treats as operating leases, and such attempts are not authorised by law because, in accordance with tax regulations, an operating lease involves only payments for use of tangible property without defining any elements used in their calculation. Such payments, therefore, cannot be considered borrowing costs because they are not associated with receipt of any funds from the lessor. As such, the payments do not relate to use of funds. And Article 15c(12) of the CIT Act mentions use of funds, not use of tangible property, which means only finance leases fall within the definition of borrowing costs.

SAC also made a point of noting that, in light of the CIT Act, a lease payment is divided into interest and capital only in the case of finance leases as only this category of contracts requires the parties to recognise taxable income and tax costs, as appropriate, in respect of the interest element of the lease payment (as opposed to the element representing repayment of the value of the leased property).

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