German tax issues regarding equipment leasing
German leasing has undergone some changes recently that have restricted the benefits available. In particular, the declining-balance depreciation method is no longer available for lessors.
The tax benefit conferred by a German lease is the benefit of applying depreciation on the asset. Depreciation is based on the acquisition cost of the asset. The straight-line method is obligatory. The depreciation rates are generally determined on the basis of tables issued by the Federal Ministry of Finance for the relevant asset. A write-down to a lower going-concern value to reflect technical or economic obsolescence is permissible for tax purposes.
The following issues should be considered in connection with German equipment leasing:
Tax accounting principles
The tax rules for the allocation of leases are based on the principle of economic ownership. Generally economic ownership resides with the legal owner of the asset. However, where someone else exercises effective control over an asset to the effect that he can practically exclude the owner from using the asset during the normal period of its useful life, the asset is attributable to that person.
The guidance issued by the German tax authorities distinguishes between full pay-out leases (financial leases) and non full pay-out leases. A German lease generally requires that the person claiming allowances is the economic owner of the asset on the basis of the following criteria:
Treatment of full pay-out leases (financial leases)
|Type of Lease||Fixed lease period 40%-90% of useful life of equipment*||Fixed lease period < 40% or > 90% of useful life of equipment|
|Without renewal or purchase option||Lessor||Lessee|
|With purchase option||Purchase price < Book value at sale||Lessee||Lessee|
|Purchase price ≥ Book value at sale||Lessor|
|With renewal option||Additional lease payments < remaining book value||Lessee||Lessee|
|Additional lease payments ≥ remaining book value||Lessor|
* The useful life of equipment is determined on the basis of tables issued by the German tax authorities.
N.B. In cases of special leasing, i.e. where the asset has been designed specifically for the lessee’s requirements and can reasonably only be used by the lessee, commercial ownership is generally ascribed to the lessee.
Where the commercial features of a lease do not exactly match the criteria set out by the German tax authorities, economic ownership must be determined on a case-by-case basis. Broadly, the substantive issue is who bears the risks and rewards attached to the leased equipment.
Treatment of non full pay-out leases
Decrees by the German tax authorities deal with three types of non full pay-out leases which run over a fixed period of more than 40% but less than 90% of the useful life of a movable asset. The following lease terms normally should not affect economic ownership of the lessor:
- Obligation on the lessee to purchase the leased equipment at a pre-determined price upon request by the lessor if the lease is not renewed at the end of the fixed lease period.
- Obligation on the lessee to reimburse a loss of the lessor if the equipment is sold at the end of the lease period at a loss. If a gain is realized upon the sale of the equipment, participation of the lessor in such gain of at least 25%.
- Termination of the lease by the lessee after the fixed lease period, in which case the lessee has to make a final payment to the lessor equivalent to the difference between the lessor’s total cost and payments made during the term of the lease. 90% of the sale proceeds realized by the lessor are credited against the final payment to be made by the lessee.
Under the interest ceiling net interest expenses, i.e. interest charges in excess of interest earned are deductible only up to 30% of EBITDA in an assessment period. If the interest earnings of the business exceed the interest expenses, the interest ceiling does not apply. Conversely, remaining non-deductible interest can be carried forward to the following year and then be deducted.
Three exemptions from the deduction restrictions apply (it is sufficient if one of the following conditions is fulfilled):
- €3m limit − If the total net debt interest (i.e. interest expenses less interest income) of the business in the assessment period is less than €3m.
- Stand-alone clause − Stand-alone businesses, i.e. businesses which do not belong to a ‘group’ or only partly belong to a ‘group’. A business belongs to a group if it can be consolidated with one or several other businesses according to the applicable reporting standards – notably, the International Financial Reporting Standards (IFRS) – or if its financial and business policies are governed by another entity (analogous to IAS 27, which, however, requires a legal agreement).
For companies, the stand-alone clause applies only where the company establishes that remuneration on the shareholder debt accounts for no more than 10% of its net expenses. Shareholder debt is assumed where the company is financed by a loan from (i) a substantial shareholder (shareholding of more than 25%); (ii) an affiliated person; or (iii) a third party having recourse against a substantial shareholder or an affiliated person.
- Equity ratio comparison − For businesses belonging to a group, if it can be shown on the basis of the financial statements for the preceding year that the equity ratio of the business according to its individual financial statements is the same or higher than the equity ratio of the group in the consolidated financial statements (so-called ‘escape clause’). In principle, the equity ratio has to be determined in accordance with IFRS; alternatively, the commercial law of a Member State of the European Union or (with certain restrictions) in accordance with US-GAAP. The equity ratio is generally defined as the ratio of equity to balance sheet total and may be subject to certain adjustments for goodwill, tax reserves, book values of shares in subsidiaries, etc.
The escape clause for businesses forming part of a controlled group applies only if the remuneration on shareholder debt accounts for no more than 10% of the net interest expense. Interest expense on loans received from substantial shareholders and affiliated persons are only counted for this purpose to the extent they are shown as liabilities in the fully consolidated accounts of the relevant corporate group. Secured bank loans do not count towards the 10% threshold if the security is provided solely by a member of the controlled group.
It should be noted that the legitimacy of the interest ceiling rules has recently been questioned by the German Federal Tax Court. Therefore, the future developments in this request should be observed closely.
The trade tax base is broadly the same as for income tax purposes. However, it is modified by certain add-backs and deductions. As far as leasing is concerned, the add-backs include 25% of the sum of (i) loan remuneration (e.g. financing expenses paid by the lessor); and (ii) 20% of the rent payable under an equipment lease. The add-back only applies to the extent payments exceed an exemption amount of €100,000. Please note that the add-backs of financing costs are currently facing harsh criticism in Germany. It remains to be seen whether this will prompt any relevant changes.
For German VAT purposes, it is crucial whether or not economic ownership is transferred by the lessor to the lessee at the beginning of the lease term (please see “Tax Accounting Principles”above).
Economic ownership with lessor
From a German VAT perspective, the lessor provides services to the lessee. The place of supply is normally where the lessee is resident. Where the lessee is resident in Germany, German VAT is charged at the standard German VAT rate of 19% in addition to the net rentals during the lease term. The German VAT on the rent payable normally becomes due on the 10th day of the month following the due date of rent itself.
Economic ownership with lessee
The transfer of economic ownership at the beginning of the lease term is considered as a supply of the equipment by the lessor to the lessee. The German tax authorities hold that the tax base for calculating VAT is equal to the aggregate amount of the rent payable (including (i) rent for a renewal period in the case of a renewable option; and (ii) agreed purchase price in the case of a purchase). The entire German VAT amount is triggered at the end of the month when the equipment is delivered if (i) the equipment is located in Germany at the time of delivery; and (ii) the transaction is not subject to a VAT exemption (i.e. the supply is zero-rated). German VAT normally becomes due on the 10th day of the month following the equipment delivery.
This article was published in the Asset & Auto Finance Country Survey for Germany by Asset Finance International in association with White Clarke Group (2015). The entire survey can be downloaded via the following link.
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