Leasing companies are unsettled and entrepreneurs terrified by Minister of Finance Bohuslav Sobotka's recently unveiled plan to change tax rules for leasing and the full Cabinet's proposal to increase the VAT on financial services.

As part of the government's public finance reform plan, Sobotka proposed extending the tax write-off period for companies that lease cars and other movable equipment.

If Sobotka's proposal takes effect as he suggests by 2006, business lease contracts could fall 20 percent and about 25 of the country's estimated 90 leasing companies could be forced to close, Vratislav Valek, president of the Association of Leasing Companies of the Czech Republic, told PBJ. Sobotka's proposal would be included in a new measure on income taxes.

Separately, the Cabinet suggested hiking the VAT applied to the leasing services (not the products that are leased which can be taxed at a separate rate). This tax would rise to 22 percent from the current 5 percent and limit the price of personal-use cars that can be written off by entrepreneurs to a maximum Kc 900,000 after January 2004.

Valek warned that any restrictions on leasing could hurt the country's economy. Leasing is popular in the Czech Republic. Last year the value of leased movable items was Kc 110 billion, or about one-third of the country's total investment in movable items. Valek said the proposed changes could damage rather than help the government's budget because the state would get less VAT revenue from sales and fewer taxes from leasing companies.

About 95 percent of transactions are handled through financial leasing contracts, which allow clients to lease items for several years and pay installments that eventually lead to full ownership. About 5 percent of deals involve operational leasing. Under these contracts, goods are leased for certain period but are returned at the end of the contract.

Daniel Sir, sales director for Prague-based leasing company Vltavin Leas, said increasing the VAT on leasing services would create an even greater problem by pushing many small players to the brink of extinction. For entrepreneurs and companies without a lot of cash, leasing provides the only opportunity to buy machinery, cars and other big-ticket items, said Bedrich Danda, chairman of the Association of Entrepreneurs of the Czech Republic.

(PBJ 01.viii.03)