Purchase or lease of fixed assets - Fiscal implications
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A company needs to equip its facilities; it therefore needs to invest in fixed assets, i.e. assets (property, equipment, fixtures and fittings, etc.) which it will keep on a long-term basis. These assets are related to both the business premises and the equipment required for business operation.
Businesses making these investments need to look into the financial solutions available to them. Depending on the amount of initial funds available and its financing options, a business can decide to purchase or lease the resources it needs.
The decision to purchase or lease will have immediate and long-term tax implications.
Who is concerned
All natural and legal persons can decide to purchase or lease the fixed assets (property, machinery, equipment, etc.) which are necessary for their activity.
How to proceed
Purchase of fixed assets: entering a sales contract
When the company acquires a fixed asset, it appears on its commercial and tax balance sheet, which is used to inform third parties with regard to the breakdown of the business's working capital.
In the event of a purchase, a company can book depreciation expenses which are then deducted from its taxable income. Maintenance costs are also deductible, as is interest on loans taken out in order to finance these fixed assets.
The purchase has immediate tax implications:
- in the event of purchasing a building, the company must pay a registration fee;
- in the event of purchasing a movable asset (a car, equipment, etc.) the company must pay VAT but it is frequently immediately and fully refundable on application to the Registration Duties, Estates and VAT Authority. It should be noted that in certain cases, the sale may be VAT-exempt.
NB: Luxembourg taxpayers making an intra-EU acquisition of goods must declare it as such in the relevant section of the VAT return: it is taxable at the rate of 17 %. On the other hand, the input tax levied on this transaction is fully deductible.
Example: purchase of a new car in Germany and subsequent registration in Luxembourg.
Germany
- price: EUR 25,000 excl. VAT (the sale is VAT exempt)
Luxembourg.
- declaration of the purchase as an 'intra-Community acquisition of goods';
- output VAT due: 25,000 x 17 % = EUR 4,250;
- declaration of the purchase as a "receipt of goods or investment goods";
- deductible input tax: 25,000 x 17 % = EUR 4,250.
Leasing of fixed assets: entering a leasing contract
Definition
A lease is a contractual credit technique by means of which a leasing company (the lessor or licensor) purchases, on request by and in accordance with the specifications of its client (the lessee or licensee), the ownership of movable or immovable assets, in order to lease them for a fixed term in exchange for fees or lease payments.
The lease payment consists of a fraction of the capital invested by the leasing company, the interest outstanding on this capital and the leasing company's profit margin.
Advantages and disadvantages
Leasing has the advantage of flexibility and frees the business from having to raise large sums at the start of its activity, at a time when income is not yet significant.
Financing an asset through leasing offers the following advantages:
- it enables payment of VAT to be spread over the full lease term, with the VAT being pre-financed by the leasing company;
- when used to finance the purchase of immovable assets, it enables the lessee to defer payment of registration fees;
- it enables the lessee to designate a third party to purchase the asset at the end of the contract;
- it is an alternative means of financing carried out without restriction on the basis of the total amount of the investment, often without the need for the lessee to provide additional collateral and without having to use their own funds;
- repayments can be tailored to forecast cash flows;
- the company's balance sheet and operating account will be calculated based on the purchase option selected. Certain ratios (solvency, debt, return on assets) can work to the business' advantage.
It is, however, more expensive in absolute terms than purchasing.
Tax impact
Tax law makes a distinction based on whether or not the asset appears on the company's balance sheet.
In principle, the asset in question is allocated to whoever is its legal owner.
However, where control of the property belongs to a third party, tax law allocates the economic ownership of the asset to that person. The lessee may in that case benefit from tax deductions:
- if the lessee is the tax owner of the asset, the asset is shown in the assets on the lessee's balance sheet, not that of the legal owner. It is also the lessee who depreciates the asset.
In these circumstances, lease payments will be broken down into 2 parts:- one part is made up of the interest, which is deductible from the user's tax base;
- and the other part is made up of debt repayments, which is non-deductible;
- if the lessee is not the tax owner of the asset, the lease payments will be fully deductible from their tax base.
Different forms of leasing exist depending on the type of assets required by the company, its financial position and the level of commitment it wishes to make: this may involve a capital lease, an operating lease or a property lease.
Comparative table: purchase - leasing
Purchase |
Leasing |
Need for financing |
No financing |
Immediate registration fee (property) or VAT on the purchase cost (car, equipment, etc.) |
Registration fee deferred over time (property) or VAT on rental payments (car, equipment, etc.) |
Tax deductions:
|
|
Entitlement to tax relief for investment |
Entitlement to tax relief for investment only in the case of capital leasing |
The fixed asset will appear on the commercial balance sheet of the business |
The fixed asset will not appear on the commercial balance sheet of the business; only the lease payments shall be entered in the profit and loss account |
Who to contact
Luxembourg Inland Revenue (ACD)
-
Luxembourg Inland Revenue (ACD)
- Address:
- 33, rue de Gasperich L-5826 Hesperange Luxembourg
Please consult the above website to find the competent department.
Registration Duties, Estates and VAT Authority (AED)
-
Registration Duties, Estates and VAT Authority (AED) Registration Duties, Estates and VAT Authority (AED)
- Address:
-
1-3, avenue Guillaume
L-1651
Luxembourg
Luxembourg
B.P. 31, L-2010 Luxembourg
- Phone:
- (+352) 247 80 800
- Fax:
- (+352) 247 90 400
- Email address:
- info@aed.public.lu
- Website:
- https://pfi.public.lu
Related procedures and links
Procedures
Links
Further information
sur le site de la Chambre des Métiers
Legal references
-
Loi modifiée du 4 décembre 1967
concernant l'impôt sur le revenu
-
Loi modifiée du 12 février 1979
concernant la taxe sur la valeur ajoutée
