Operating Lease With Calculation of Payment in Kind
We should first define payment in kind. The simplest definition would say that payment in kind includes all assets an employee receives from her/his employer and uses for private purposes. Payment in kind implies a net value, while the employer incurs all taxes and contributions.
When payment in kind is calculated for using a personal car, 20% of total lease rate and fuel would be considered an additional net payroll. Basic net payroll, defined by Employment contract, should not be mixed up with net payment in kind. Why payment in kind? Because in this case all car-related expenses are tax deductible, i.e. you do not have the 30% of lease which raises the income tax base.
It might be easier to show this using numbers:
Let us assume your value of lease payments amounts to HRK 112 500.00.
20% of this value presents a payment in kind:
112 500.00 * 20% = HRK 22 500.00
As the calculation relates to a one-year period, the payment in kind amounting to HRK 22 500.00 should logically be divided by 12 months, meaning that monthly payment in kind would amount to HRK 1 875.00.
Now it is clear to everyone that this payroll is also tax deductible. In this case the tax and contributions would be added to regular payroll calculation. Therefore, let us assume your employee’s net payroll amounts to HRK 5 000.00. The employee uses the above-mentioned personal car having a monthly net payment in kind amounting to HRK 1 875.00. His HRK 5 000.00 payroll taxes would amount to HRK 3 197.82, i.e. the total payroll cost would amount to HRK 8 197.82. If the payment in kind amounting to HRK 1 875.00 is added to this net payroll, total monthly taxes would amount to HRK 5 152.61. Therefore, if you calculate payment in kind, your monthly expenses will be HRK 1 954.79 higher and your annual expenses will be HRK 23 457.48 higher. These contributions will increase your expenses and your profit and loss account will look like in this simple example:
Total income: HRK 200 000.00
Total expenditure: HRK 112 500.00 + HRK 23 457.48 =
Profit: HRK 64 042.52
Income tax: HRK 12 808.50
This means that if you choose the option “Operating lease without calculation of payment in kind”, you will pay income tax amounting to HRK 24 250.00, and if you choose the option “Operating lease with calculation of payment in kind”, you will pay income tax amounting to HRK 12 808.50 as well as taxes and contributions amounting to HRK 23 457.48 for calculation of payment in kind.
We can conclude that the option “Operating lease with calculation of payment in kind” is more expensive, not only for the companies operating without loss, but for all companies, because they have to pay taxes and contributions for payment in kind.
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