Forms and legal classification of leasing contracts II

0. Introduction

Both real estate and movable assets (movables) can be considered as objects for financing through leasing. In the management of real estate there is always the acquisition of equipment, machinery, vehicles, for which the question of financing arises. This article gives an overview in its three parts and thus helps the house owner and manager to subject possible offers in all areas to a critical appraisal.


1. definition

In practice, two main types have emerged, also as a result of the tax regulations in the leasing decrees of the BMF. These two main forms of contractual arrangements in leasing can then be further distinguished.


1.1. Finance lease

In practice, the most widespread form is the finance lease. A leasing company (lessor) procures an asset after prior selection by the lessee. While the lessor acquires ownership, he immediately grants the lessee a right of use against payment. The characteristic feature of finance leasing is that the usage relationship is non-cancellable for a certain basic rental period – at most the normal useful life, but usually shorter. The lessee is assigned the warranty claims against the manufacturer and is obligated – as a rule and at his own expense – to comprehensive insurance, maintenance and repair.


1.2. Other arrangements

The counterpart to finance leasing is so-called operating leasing, in which the lessor continues to bear almost all the risks, and the transfer of use comes very close to a rental, especially because no non-cancellable basic rental period is agreed in this form. The following particular individual arrangements have become prominent in leasing:


1.2.1. Sale-and-lease-back leasing

In the case of sale-and-lease-back leasing, the entrepreneur sells the asset to the lessor, thereby obtaining liquidity, and immediately leases the asset back for further use – in particular in his business.

1.2.2. Special leasing

Special leasing refers to an object that can be used practically exclusively by the lessee, e.g. an object that has been specially manufactured for the lessee’s purposes. Therefore, usually only the lessee is able to continue to use the leasing object (economically) sensibly after the expiry of the basic leasing period.

2. tax attribution

The starting point for tax considerations is the question of whether the leased asset is attributable to the lessee or the lessor. The decisive factor here is not the formal legal arrangements, but the economic circumstances in the individual case: what matters here is who is the beneficial owner within the meaning of section 39 AO. This is the person who has both the substance and the proceeds of a thing, usually in full and in perpetuity. The substance also includes the chance of value increases, as well as the risk of reductions in value or the loss of the leased object. The attribution itself affects the balance sheet recognition, the entitlement to depreciation (AfA), the treatment of leasing instalments, the unit value of the business assets for wealth tax, and finally also trade tax. Based on the BFH case law and the opinions of the BMF (including leasing decrees), typical tax law contractual arrangements have emerged which can be distinguished as follows:


2.1. Equipment Leasing

The BMF distinguishes movable property leasing from real estate leasing.

2.1.1. Full amortization

If the acquisition and financing costs of the lessor are covered by the sum of the leasing instalments during the – in this case non-cancellable – basic leasing period, this is referred to as full pay-out contract. The BMF has regulated the income tax treatment, and here in particular the tax allocation, in the case of finance leasing of movables in the decree of 19 April 1971 (Mobilien-Leasing-Erlass), which in turn is based on the case law of the BFH. The decisive factor here is how the basic lease term is calculated and what agreements the lessor and the lessee have made for the period after the expiry of the basic lease term.

Basic lease term over 90% If the – non-cancellable – basic lease term amounts to more than 90% of the normal useful life of the leased asset, this is attributable to the lessee. This follows the consideration that economically the lessee is the owner, because at the end of the basic lease term the value of the leased asset is approximately zero, and until then the lessor has no access to the leased asset.

Basic lease term less than 40% If the – non-cancellable – basic lease term is less than 40% of the normal useful life of the leased asset, this is also attributable to the lessee – as a rule in the case of a full pay-out contract. This follows from the consideration that the lessee here has paid a completely excessive price compared to the actual period of use, and therefore secures a further possibility of use for the time after the expiry of the initially agreed basic leasing period. This is usually done by agreeing an option to extend the lease or rental agreement or to purchase the leased asset.

Basic lease term between 40% and 90% Difficulties arise in the other cases, namely those with a basic lease term of more than 40% and less than 90% of the normal useful life of the leased asset. In this respect, the decisive factor is first of all which agreements the parties have made for the period after expiry of the fixed basic rental period. option

If no purchase or lease extension option has been agreed, the leased asset is attributable to the lessor. The lessor would like to be able to continue to dispose of the leasing object after the expiry of the basic leasing period, to use it as he sees fit – possibly also for other purposes. In this case, the lessor’s claim for surrender of the leased property is regularly of value because the leased property – from the point of view at the time of conclusion of the contract – can still be used at the end of the contract. With purchase option

If, on the other hand, the lessee has a lease with a purchase option, a further distinction must be made as follows: – If the purchase price provided for when the option is exercised is lower than the residual book value at the end of the basic lease term or the – lower – fair market value, the leased asset is attributable to the lessee. – If there is no shortfall, the allocation is made to the lessor. Thus, the decisive factor for tax attribution is who has an economic interest or benefit in the event that the option is exercised. With extension option

If, however, the lessee has a leasing contract with an option to extend the leasing contract, a further distinction must be made as follows: – If the agreed “follow-up rent” is lower than the depreciation of the asset, in the case of the exercise of the option, an allocation must be made to the lessee. – If the subsequent rent covers the consumption of value, the leased asset is attributed to the lessor. Accordingly, also in this case of an option, the decisive factor for tax attribution is who has an economic advantage in the event of exercising the option.


2.1.2. Partial amortization

If the lessor only receives part of his investment and financing costs from the lessee during the basic lease term, this is referred to as partial amortisation (non-full-pay-out contract). There is only one exception to the principle of attribution to the lessor, namely if, upon sale of the leased asset by the lessor, less than 25% of any additional proceeds remain with the lessor. In principle, this is the only case in which an allocation to the lessee comes into question. For further details see the partial amortisation decree of the BMF of 22.12.1975.


2.1.3. Other (operating, special leasing)

In the case of an operating lease, which is a typical rental agreement, it goes without saying that the lessor is responsible for the lease. Conversely, in the case of special leasing, because of the expected takeover of the leasing object after expiry of the leasing contract, only attribution to the lessee is possible, also in accordance with the case law of the BFH.


2.2. Real Estate Leasing

In a further leasing decree of 21.03.1972, the BMF created a regulation for real estate leasing in the same way as for movable property leasing.


2.2.1. Full amortization

This regulation, which is intended for the case of full amortisation, has a special feature: In accordance with accounting law, a detailed distinction is made between land on the one hand and buildings on the other: The above principles apply accordingly to buildings (cf. 2.1.1. with subsections). The land, on the other hand, is generally attributed to the lessor. Only in the case that the lessee has been granted an option to purchase the land – applying the above principles mutatis mutandis – can land also be attributed to the lessee. In general, it should be noted that, in accordance with the change in the law since the BMF’s real estate decree, the useful life is no longer 50 years, but rather 25 years – cf. section 7 (4) and (5) EStG.


2.2.2. Partial amortization

For the sake of completeness, it should be briefly pointed out here that in this case, according to a highly controversial view, the allocation is made to the lessor; unless the lessor only receives less than 25% of that share of the additional proceeds which is above the residual amortisation.


2.2.3. Other (operating, special leasing)

In the case of special leases, the land and buildings are attributed to the lessee. In the case of operating leases, in the absence of an option for the lessee, the allocation is always made to the lessor.


3. attribution consequences


3.1. Attribution to the lessor

Attribution to the lessor has different consequences in the following respects:


3.1.1. Accounting tax law

First of all, the asset has to be reported in the lessor’s balance sheet by capitalising the acquisition or production costs, cf. paragraph 6(1)(1) and (2) EStG. In addition, if the leased asset is a depreciable asset, the lessor must depreciate it over its useful life – i.e. not over the lease term, Section 7 of the German Income Tax Act (EStG). Incidental costs, such as assembly costs and freight, do not constitute acquisition costs and are therefore immediately deductible by the lessor:

Deferred income must be recognised if the lessee is required to reimburse the lessor for these costs. This corresponds to the treatment of special payments and advance rentals. Here, too, the principle applies that the lessor’s accounting must correspond inversely to that of the lessee. The leased asset is also immediately deductible as a so-called low-value asset within the scope of the option under section 6(2) of the EStG. If the lessor has taken out a loan for the acquisition of the leased asset, he must show this as a liability in the balance sheet, as is otherwise customary.

Finally, the leasing rates lead to operating expenses for the lessee and to operating income for the lessor, which flow into the income statement(s) via expense or revenue accounts. The leasing instalments are attributed to the financial year in which they were contractually incurred; in the case of surplus accounting, the payment is decisive for the accrual accounting; paragraph 11 EStG. Therefore, receivables for future lease payments are not to be capitalized. In the case of the lessee, the leasing contract is regarded as a so-called pending transaction, so that no accounting or capitalisation is possible for him. If future losses from the sale of the leased asset are foreseeable, they have no effect: neither the formation of a provision is possible, nor is increased depreciation.

The formation of a provision can only be considered if so-called impending losses are involved. If charges from a share of the proceeds from the sale of the leased asset are expected in the future, neither a provision nor deferred income may be recognized. If special payments or advance rentals were made by the lessee when the contract was concluded, these are to be treated as additional usage fees. Therefore, these payments, like rent prepayments, are to be deferred and reversed during the contractually stipulated basic rental period.


3.1.2. Trade tax law

Any loan or other financing costs incurred by the lessor as a result of the acquisition of the leased asset are added to the trade income at a rate of 50 out of 100 as so-called permanent debt interest. See paragraph 8(1) of the GewStG.


3.1.3. Wealth tax

For wealth tax purposes, the leased asset is allocated on the basis of the so-called standard value of the business assets: the lessor must include the leased asset in the statement of assets when determining the standard value of the business assets. In this context, the valuation must be carried out at the partial value in the case of movables and at the standard value in the case of real estate, Paragraph 109 (1) and (2) BewG. In addition, if the acquisition is financed, the lessor must take the acquisition loan or credit into account as a liability item. In the case of real estate leasing, this regularly results in negative operating assets – on balance from a leasing contract – in the case of financing.


3.1.4. Value added tax law

In sales tax law, the attribution follows that of income tax law. Equipment Leasing

In the case of equipment leasing, the instalments are subject to turnover tax, paragraph 1(1)(1) in conjunction with paragraph 3(8) of the Turnover Tax Act. The lessee is entitled to deduct input tax in accordance with section 15 of the German Turnover Tax Act (UStG), provided that no small business option in accordance with section 19 UStG has been exercised. Real Estate Leasing

In principle, payments to the lessor in this case are taxable, but not subject to tax under paragraph 4 number 12 a UStG. In practice, however, lessors opt for VAT in accordance with Section 9 UStG because they then benefit from the right to deduct input tax as a commercial enterprise in accordance with Section 15 UStG.


3.1.5. Real estate transfer tax law

Like any other land acquisition, the acquisition of land by the lessor is subject to land transfer tax. The granting of an option, on the other hand, is not taxable – in contrast to the later actual exercise of the option.

With regard to possible exemptions, e.g. in accordance with paragraph 3 of the following GrErStG, no special features apply, so that these can also apply in the case of leasing in the event of acquisition by the lessor or purchase in the context of exercising the option.

It should be noted that, according to a BFH ruling from 1982, no more real estate transfer tax can be “saved” in the sale-and-lease-back procedure by establishing a property company – in the legal form of a KG: The court ruled that in the case of a preconceived plan to leave its shareholder position to a third party, Section 5(2) GrErStG does not apply.

Indications for the preconceived plan are the factual and temporal connection with the contribution of the property to the property company.


3.2. Attribution to the lessee

The attribution to the lessee has further different consequences:


3.2.1. Accounting tax law

The starting point for this consideration is that the lessor has, as it were, acquired a purchase price claim – to be paid in instalments – by concluding the leasing contract. The lessor’s claim must be shown in the balance sheet, valued at the nominal value corresponding to the acquisition and/or production cost of the leased asset: this corresponds to the debt to be carried as a liability by the lessee in the balance sheet, with the lessor’s share of interest and costs being eliminated.

A special feature applies in the case of manufacturer leasing: the purchase price to be achieved by the lessor in the case of a cash sale to any third party – i.e. not the actual production costs of the lessor – is to be recognised, because the economic profit is almost certainly realised upon conclusion of the leasing contract, given the usual creditworthiness of the lessee. Since the sum of the leasing instalments is higher than this nominal value because other components such as interest and cost components are also included, the individual leasing instalments must be broken down mathematically:

– First of all, the repayment portion not affecting net income must be recognized.

– Subsequently, the remaining portion for interest and costs affecting net income leads to a profit entry for the lessor, thus finally to a reflection in the profit and loss account.

The lessee must – as already mentioned, in a mirror image so to speak – capitalise the leasing object with the acquisition and/or production costs. If the lessee does not know the acquisition or production costs, this amount is determined – only on the side of the lessee – by discounting the sum of the leasing instalments. In addition, the lessee must capitalize all other expenses for the leased asset that are not included in the lease payments.

He can – in accordance with the useful life of the asset – depreciate it, which then – and only periodically – affects the income statement. The purchase price debt, i.e. the total of the leasing instalments, must be carried by the lessee as a liability in the balance sheet. This liability is eliminated by the portion of the lease payments that does not affect profit or loss (repayment portion).

The remaining portion of the lease payments, the interest and cost portion recognized in profit or loss, results in operating expenses for the lessee that are recognized directly in profit or loss. In terms of time, the lessee’s initial accounting results in equal values on both sides of the balance sheet. According to this, the two sides of the balance sheet can develop differently, which is caused by the division of the leasing instalments into a part affecting net income and a part not affecting net income, the depreciation according to the normal useful life and the proportionally increasing repayment share of the leasing instalments over time. If it turns out in the course of time that leasing contracts could be concluded at substantially more favourable conditions (cf. EDP sector), then – in the opinion of the BFH – no provision for impending losses can be formed for this reason alone.


3.2.2. Trade tax law

As a rule, the lessee must add the purchase price debt to the trade capital as a permanent debt, cf. section 12(2)(1) GewStG. The lessee has to add the interest contained in the instalments, the interest portion, back to the trade income as so-called permanent debt interest, cf. paragraph 8 number 1 GewStG.


3.2.3. Wealth tax

The lessor shall recognise its claim in the statement of assets and liabilities for the purpose of determining the unit value of the business assets. The lessee thus recognises his purchase price debt and also the leased asset. In accordance with the BMF decree of 12 August 1971, the leasing instalments still to be paid as well as bindingly promised services after the expiry of the basic leasing period are to be treated on the reference date in accordance with the instalments of a non-interest-bearing purchase price debt: Therefore, discounting to the cash value must be carried out at the interest rate of 5.5%, Paragraph 12(3) BewG.


3.2.4. Value added tax law Equipment Leasing

In this case, the entire payments made by the lessee are subject to VAT from the start of the contract: in addition to the agreed leasing instalments, this also includes those in the case of a contract extension and a purchase price in the case of the exercise of any agreed purchase option. If the purchase option is not exercised at a later date, the VAT must be adjusted in accordance with section 17 of the German Turnover Tax Act (UStG). The BFH has clarified that – in terms of calculation – interest included in the leasing instalments is not exempt from VAT pursuant to Section 4 (8) UStG. Real Estate Leasing

No special features apply here. The lessor can claim the input taxes paid by him from construction invoices. The leasing instalments are subject to value added tax by the lessor, so that the lessee – provided he is an entrepreneur within the meaning of the Value Added Tax Act – is regularly entitled to deduct input tax.


3.2.5. Real estate transfer tax law

Different opinions are held – also in the literature – on the attribution to the lessee: While the BFH assumes an acquisition transaction relevant for land transfer tax only if, in the internal relationship between the lessee and the lessor, the former is to be regarded as the owner of the leased property under civil law; the BMF, on the other hand, takes the standard case of leasing treatment as a basis: According to this, no exception to the leasing decree should apply here, and Section 1 (2) GrErStG should be applicable, because an acquisition transaction relevant for land transfer tax should also follow from the economic attribution pursuant to Section 39 (2) AO. In this respect, reference is made at this point to Section 3.1.5. referred to.


Bibliography for Part II: Bordewin, Arno: Leasing in Tax Law, Wiesbaden 1989, Haberstock, Lothar: Credit Purchase or Leasing – A Comparison of Advantages Taking into Account the Tax Effects, in: Tax Consultant Yearbook Hamannt, Manfred (ed.): Handbuch der Unternehmensbesteuerung, Düsseldorf 1990 Spittler, Hans-Joachim: Leasing for Practice, Cologne 1990


by Dr. Johannes Fiala

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Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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