In terms of tax legislation, financial leasing (rent) is a business transaction carried out by an individual or a legal personand involves the transfer to the lessee of the property that is the main asset and acquired or made by the lessor, as well as all risks and rewards associated with the right of use and ownership of the leased asset. Read on taxation of financial leasing transactions – in the following.
When leasing to be considered financial
Leasing is considered financial for tax purposes, if a lease agreement contains one of the following conditions:
- ¾ the leased asset is transferred for a period during which at least 75% of its initial value is amortized and the lessee is obliged to purchase the leased asset at the price specified in the lease agreement;
- ¾ the balance (residual) value of the leased asset at the time of the expiration of the leasing agreement is not more than 25% of its value at the beginning of the lease agreement;
- ¾ the amount of lease payments from the beginning of the lease term is equal to or exceeds the initial value of the leased asset;
- ¾ property transferred to the financial leasing, manufactured by the order of the lessee, and after the expiration of the lease agreement can not be used by other persons, except the lessee, based on its technological and qualitative characteristics.
Also, it should be noted that regardless of whether the business transaction is governed by the norms of para.14.1.97 of TCU or not, the parties to the contract have the right at the time of conclusion of the transaction to determine such a transaction as an operating lease without the right to further change the status of such transaction until the expiration of the relevant agreement.
Income Tax
In accordance with the rules established in para.134.1.1 of the Tax Code of Ukraine (hereinafter - TCU), the income tax is determined by adjusting the financial result before tax (that is, according to the accounting rules) for the differences that arise in accordance with the provisions of the Tax Code. In this case, the order of reflection in the accounting transactions of sale of the asset with the conclusion of an agreement on its receipt by the seller in the financial lease and sale of the asset with the conclusion of an agreement on its receipt by the seller in operating lease is determined by paragraphs 19 and 20 of Accounting Standards 14.
The lessor at the time of transfer of own fixed assets into a financial lease recognizes in the accounting income from the sale of such an asset. It increases the financial result for tax purposes. At the same time, the financial result is reduced by the book value of the leased asset.
In addition, high-income enterprises (with an annual income of over UAH 20 million) and low-income companies, who have decided to apply tax differences, will have to adjust the difference on the residual value of the leased asset in accordance with paragraphs 138.1, 138.2 of TCU. For this purpose, the accounting result before taxation to be:
- increased by the residual value of an item of fixed assets determined in accordance with Accounting Standards or IFRS;
- reduced to the residual value of an item of fixed assets determined by tax rules.
After such an adjustment, the residual value of an item of fixed assets will affect the subject to the income tax.
The returning the item to a lessor will not affect his/her tax records.
As for the tax accounting of lease payments, it is similar to their accounting. It is not foreseen the adjusting of financial result for the lessor.
Part of the lease payments in the amount of compensation for the item’s value are included in income when it is transferred, its cost (residual value) is attributed to costs, and financial income increases the financial result on the date of their accrual.
In the accounting of the lessee, the financial lease object is reflected as an asset and depreciated over the expected use period.
The depreciation charge begins with the month following the month the item of fixed asset is put into operation.
The method of depreciation is chosen by the lessee independently, taking into account the expected method of obtaining economic benefits from its use. The chosen method is reviewed in case of changing the expected way of obtaining economic benefits from its use. The depreciation charge for the new method begins with the month following the month of the decision to change the depreciation method (para.28 of Accounting Standards 7 “Fixed assets”).
The peculiarities of the tax accounting of financial leasing transactions by the lessee are not provided for in TCU norms. The receipt of a financial lease object does not affect the lessee’s tax accounting. Fixed assets received in financial leases are subject to depreciation in accordance with paragraph 138.3 of TCU. The methods provided by Accounting Standards, except for the “production” method (para.138.3.1 of TCU), are used for its accrual.
In this case (if the lessee adjusts the financial result for the difference) in accordance with paragraphs 138.1 and 138.2, the financial result before tax is increased by the amount of accrued depreciation on such fixed assets in accordance with Accounting Standards or IFRS and is reduced by the amount of the calculated depreciation of fixed assets in accordance with paragraph 138.3 of TCU.
The amount of the lease payment is reflected in the tax accounting of the lessee in accordance with the rules of accounting, adjustments to the financial results are not provided (with the exception of transactions with related persons - non-residents).
Value Added Tax
The actual transfers of tangible assets to another person on the basis of a financial lease agreement as well as the return of these tangible assets are considered to be the supply of goods (para. “a” of para.14.1.191of TCU).
Such transactions are the subject to VAT taxation (para. “a” of para.185.1, para.196.1.2 of TCU).
The VAT base is determined in accordance with paragraph 188.1 of TCU in the amount of the contractual value.
The lessor has tax liabilities on the date of the actual transfer of the financial leasing object to the lessee’s use (para.187.6 of TCU). As of this date, the lessor makes a tax invoice for the entire value of the object and registers it in the Unified Register of Tax Invoices (hereinafter URTI).
Also, it should be noted that transactions involving the accrual of interest or commission by the lessor as part of the lease payment are not subject to VAT (para.196.1.2 of TCU). But if the lease payment includes compensation of some expenses of the lessor, related to the implementation of the financial lease agreement, such part of the lease payment should be subject to VAT.
Since part of the lease payment is subject to VAT, and other part (in the amount of interest and commission) - no, the lessor must distribute a tax credit on VAT in accordance with the requirements of Article 199 of TCU.
The lessee has the right to a tax credit on VAT on the date of the actual receipt of the financial lease object (para.198.2 of TCU). At the same time, the basis for VAT calculation in the tax credit is a tax invoice, prepared and registered by the lessor in the URTI (para.201.10 of TCU).
In the future, the tax credit of lessee does not increase, when payment of the amount of compensation for part of the value of the object of financial leasing in the composition of lease payments.
The return of tangible assets under a finance lease agreement is considered to be the supply of goods. That is, this transaction is also subject to VAT. For a VAT payer who returns a financial leasing object to a lessor without acquiring the object in property, such a transfer for taxation purposes is equivalent to a reverse sale. The VAT base is determined on the basis of its contractual value (para. 188.1 of TCU).
