The appeal of financial leasing for entrepreneurs will increase from 1 January 2025, but not for everyone.

From 1 January 2025, an amendment to the VAT Act will come into force, which modifies the characteristics of financial leasing from the perspective of value added tax. The reclassification of finance leases as supplies of goods will have a significant impact on the cash flow of both the lessee and the leasing company itself.

Under the current interpretation of the VAT Act, a finance lease transaction is now deemed a supply of a service if there is an option (right) for the lessee to purchase the leased item upon termination of the lease agreement. This interpretation allows leasing companies to treat most leasing contracts as a supply of a service and to pay VAT on the individual instalments during the term of the lease contract. A finance lease transaction is deemed to be a supply of goods if, at the conclusion of the contract, the parties have agreed in advance to the obligation to purchase the leased item. Leasing contracts are therefore generally set up so as to include an option to purchase the leased item at the end of the finance lease and, therefore, so that the leasing companies are not obliged to deduct VAT on the entire sales price at the beginning of the finance lease. This has a positive effect on the cash flow of the leasing company, but the Slovak buyer is at a disadvantage compared to foreign entrepreneurs who, in the case of finance leases abroad, usually deduct VAT at the beginning of the finance lease.   

According to the EU Court of Justice's rulings and the VAT Directive, financial leasing is considered a supply of goods if it meets the following two characteristics:

• It is a transfer of property under a lease agreement for a specified period or under a deferred payment asset sale agreement;
• Under normal circumstances, ownership of the subject of the lease is acquired at the latest upon payment of the last instalment.

For more on this topic, see also our article Leasing business at risk?

From 1 January 2025, the Slovak VAT Act will be aligned with the European Directive. Thus, if it can be inferred from the terms of the lease contract that the exercise of the option appears to be the only economically rational choice that the lessee will be able to make at some point, as long as the lease contract is performed to its end, the finance lease will have to be treated as a supply of goods. This change will bring a significant disadvantage to the cash flow of leasing companies. On the other hand, for ordinary entrepreneurs who buy a car, machinery or other assets on lease, this change is welcome, as they will deduct the VAT on the purchase price they have not yet paid to the leasing company. However, it remains to be seen how leasing companies will translate this into the appeal of financial leasing, for example in the form of pricing, and whether they will no longer promote operating leases without an agreed right to buy the leased item.

Since the change to the VAT Act will take effect from 1 January 2025, the above tax regime will only apply to leasing contracts entered into after 31 December 2024.