Leasing is a medium or long term contractual credit technique whereby a leasing company (the lessor or licensor), on request by and in accordance with the specifications of its client (the lessee or licensee), acquires full ownership of movable or immovable assets for business use with a view to leasing them to the client for a specific period and in exchange for fees or lease payments.
At the end of the fixed period, the lessee generally has several options. He may:
There are different forms of leasing depending on the type of asset required by the company, its financial possibilities and the level of responsibility it wishes to engage: Each form of leasing has a different fiscal implications.
Any business may resort to leasing. Leasing can complete or replace the classic ways of business financing, i.e. through equity capital (or shareholders' equity) or loan capital, and it represents an alternative to the direct purchase of fixed assets.
From a fiscal point of view, leasing has several advantages.
The payment of VAT is spread over the full lease term and VAT is pre-financed by the leasing company.
Leasing may give access to tax deductions. There are 2 possible scenarios:
Tax ownership is determined according to the type of lease contract.
Capital leasing is the most common financing technique for investments in capital assets. It enables the business to invest without impacting its cash flow. Capital leasing consists in:
During this period of time, the basic lease term is irrevocable for both parties and:
At the end of the contract, the lessee has several options:
As the lessee pays the full purchase cost of the asset (including interest) during the basic lease term, the purchase of the asset at the end of the contract is very likely as the cost of the purchase option is very low.
NB: a company car purchased by an employee at a price which is lower than the market value is considered to be a non-periodical remuneration by the Luxembourg Inland Revenue (ACD) and will be taxed at the moment of purchase.
The determination of tax ownership depends on the possibility to purchase the leased asset.
Where a lease contract is concluded without purchase option, the tax ownership will be allocated depending on the duration of the basic lease term:
Duration of basic lease term = Duration of lease term / Duration of useful life of asset x 100
Example : a company car is leased by a company for its employee.
Useful life: 4 years (48 months)
The conditions for capital leasing are met.
Duration of basic lease term = 43 / 48 x 100 = 89.58 %
Since the basic (irrevocable) lease term is less than 90 % of the asset’s useful life, the car is allocated to the lessor.
Where the contract is concluded with a purchase option, the tax ownership is allocated to the lessee if the following 2 conditions are met:
Tax ownership is allocated to the lessor in every other case.
Book value = Price of the asset – Depreciation
Depreciation = Price of the asset / Duration of fiscal life
Example: a company car is leased by a company for its employee.
Useful life: 4 years (48 months)
The cost of the purchase option represents 10 % of the assets value if new (initial price).
Operating leasing is a means to finance medium term regular investment projects such as a vehicle fleet (cars, vans, trucks, boats and planes), production tools, equipment or machinery and other movable assets (computers, printers, photocopiers, etc.).
It also often contains a service or maintenance component, i.e. in addition to the financing component, the contract contains additional services, such as the maintenance of the asset, insurance and repairs, etc.
Le lessee is simply renting movable assets, also from an economic standpoint.
The contract is similar to a rental contract and does not include a purchase option (the purchase may be negotiated at the end of the contract).
The leased item is returned to the lessor at the end of the contract, according to the precise terms defined and agreed upon at the time the contract was concluded.
The risks are limited for the lessee who is not the owner of the asset and therefore does not have the same rights and obligations inherent to ownership.
The lessee has no other obligation. The sale of the asset is deemed to be undertaken by the leasing company.
the lessee is the tax owner of the asset.
He will be granted a tax credit on the grounds of investments. The tax credit amounts to:
The lessee is liable for VAT on lease payments. VAT is fully recoverable.
Property leasing is a means to finance the purchase and, sometimes, the construction of immovable assets which includes constructed land, existing buildings or still to be built, parts of buildings, commercial buildings and offices, manufacturing and industrial buildings, storage depots, movable assets which have become immovable assets through incorporation.
The lessor commits himself to purchase or to construct a building for business use and to provide enjoyment of said property to his contracting partner (e.g. via a long term lease).
Property leasing has the advantage in that it does not block the capital, nor does it reduce the balance sheet result. The lessee in property leasing receives the right of long term use. The contract must stipulate what will happen to the property at the end of the term. The lessee may or may not benefit from a purchase option on the asset. Registration fees are deferred, where applicable, to the day the purchase option is exercised.
Tax ownership of the building is allocated to the lessee.
Tax ownership of the land is determined depending on whether there is a purchase option on the asset leased:
In the event the lessee exercices the purchase option, he must pay transfer duties to the Registration Duties, Estates and VAT Authority. The transfer duties consist of 2 elements:
A communal surcharge of 50 % will apply if the building is located on the territory of the Luxembourg commune.
Transfer duties apply to the highest of the following 2 amounts:
Property leasing is not subject to the payment of proportional registration fees if all of the following conditions are met: