Leasing and VAT

When financing a car, as well as other tangible assets (e.g., machinery, technology, and equipment), entrepreneurs often encounter the term leasing. There is a wide range of credit products on the market designated as leasing. In practice, these products differ significantly in their parameters, especially the transfer of ownership of the leased item or the down payment. These and other facts also affect the entrepreneur's accounting for leasing transactions, as well as the VAT deduction for a taxpayer.

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We provide an overview of the individual types of leasing with a brief explanation of these leasing forms:

• Financial leasing - is a form of acquiring tangible assets based on a lease agreement with an agreed-upon right to purchase the leased item. It is a long-term rental relationship during which the lessee pays the lessor a down payment (the first instalment) and agreed instalments (monthly, for a duration as agreed, ranging from 12 to 60 months). The leasing company remains the owner of the asset during the term of the lease agreement; however, in accordance with Slovak legislation, the lessee is entitled to account for the asset in their accounting records and simultaneously claim tax depreciation of this asset as an expense. After the lease agreement ends and all instalments and the purchase price are paid, the ownership right transfers to the lessee.
• Operating leasing - this is a classic rental of tangible assets, where the legal and economic owner is the leasing company. Ownership does not transfer to the lessee during or after the end of the lease. The lessee (entrepreneur) does not pay any down payment but pays monthly rent to the lessor, from which they claim a VAT deduction. The leased item is not recorded in the lessee's asset register.
• Sale and leaseback - an entrepreneur sells their car or equipment to a leasing company, which then leases it back to them under a financial lease. From 1 January 2024, based on the interpretation of European case law, it was decided that for most sale and leaseback arrangements, the right to dispose of the goods as an owner does not transfer to the leasing company, and therefore the initial transfer of the equipment from the lessee to the leasing company is not subject to VAT, and the leaseback is considered a financial service exempt from VAT under Section 39 of the VAT Act. An exception is sale and operating leaseback, where the lessee's option to purchase the leased item is excluded; therefore, sale and operating leaseback transactions remain subject to VAT.
• Autocredit leasing (loan) - this is a classic loan to finance the purchase of equipment for business purposes. The buyer becomes the owner and holder of the equipment immediately upon taking possession of it. The buyer claims input VAT from the purchase of the equipment immediately upon its purchase (receipt) from the full purchase price of the equipment. The entrepreneur repays the loan in monthly instalments for a duration according to the agreed contract terms, usually from 12-60 months. These loan instalments are considered a financial service exempt from VAT under Section 39 of the VAT Act.

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In our article, we specifically address the topic of financial leasing, where a significant change in the VAT area has occurred in Slovakia from 1 January 2025, which affects the VAT deduction from financial leasing. Originally, VAT was applied in the individual financial leasing instalments, i.e., gradually, monthly, according to the amount of the agreed instalment.

For new financial leasing contracts concluded from 1 January 2025, the taxpayer (entrepreneur) can claim the VAT deduction immediately upon the purchase (receipt) of the equipment from its full purchase price. On the other hand, the leasing company is obliged to remit the tax on the entire selling price, not on the individual instalments, as was the case until 31 December 2024.

The reason for this change is an amendment to the VAT Act, where financial leasing was reclassified from a supply of services to a supply of goods. This amendment is based on the case law of the European Court of Justice (ECJ), according to which if a purchase option for the vehicle at a negligible or symbolic price is agreed upon at the end of the lease, it is economically irrational for the lessee not to purchase the equipment. Therefore, it must be considered a supply of goods from the very beginning of the transaction.

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We note that this change in practice brings with it an effort by leasing companies to avoid the obligation to remit tax at the very beginning of the financial lease, through new credit products with an option to purchase the asset for an increased instalment at the end of the lease. In this way, leasing companies want to ensure that financial leasing continues to be considered a supply of services from a VAT perspective, not a supply of goods, and thus the tax liability arises from the individual leasing instalments, not at its beginning. Therefore, it is always necessary to monitor the terms of the lease agreement for financial leasing for the taxpayer.

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Do you need advice in the area of accounting or taxes related to financial leasing or another type of credit financing? Do not hesitate to contact us, and we will be happy to help you.