Real Estate Real Estate Leasing* Leasing* *connectedthinking
Real Estate Leasing*Real Estate Leasing*
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Slide 219 October 2005
Real Estate LeasingPricewaterhouseCoopers
Content
1. Accounting
Dan Marinescu, Senior Tax Consultant PricewaterhouseCoopers
2. Tax
Richard Grotendorst, Tax Manager PricewaterhouseCoopers
3. VAT
Diana Coroaba, VAT Manager, PricewaterhouseCoopers
Real Estate Leasing* Real Estate Leasing* AccountingAccounting
*connectedthinking
Dan Marinescu – Senior Tax ConsultantDan Marinescu – Senior Tax Consultant
Slide 419 October 2005
Real Estate LeasingPricewaterhouseCoopers
Operating Lessor Accounting
Rental Income
Recognise on straight-line basis over the lease term
Unless some other systematic basis is more representative of the time pattern in which the benefit derived from the leased asset is diminished
Costs
Costs, including depreciation, incurred in earning the lease income are recognised as expenses
Depreciation allocated on a systematic basis consistent with the lessor's policy for similar assets
Initial direct costs (e.g. legal fees) on an operating lease
Defer or Recognise
Slide 519 October 2005
Real Estate LeasingPricewaterhouseCoopers
Operating Lessee Accounting
Rental expenses
Recognise on straight-line basis over the lease term
Unless some other systematic basis is more representative of the time pattern of the lessee’s benefit
Costs
Costs for services, maintenance and insurance are recognised as expense when incurred
Investment property under IAS 40
A real estate property interest held under operating lease can be classified as investment property
Property interest is accounted for as finance lease
The fair value model must be adopted
Provided the Real Estate property is held for capital appreciation or to earn lease rentals
Slide 619 October 2005
Real Estate LeasingPricewaterhouseCoopers
Finance LesseeAccounting
Recognises the asset and the lease obligation on balance sheet
at the lower of the present value of the minimum lease payments (MLP) and the fair value of the asset
Use interest rate implicit in the lease if this is practicable to determine; if not, use lessee’s incremental borrowing rate
Initial direct costs incurred by the lessee in securing the lease (e.g. commission and legal fees) are included as part of the recognised asset
Slide 719 October 2005
Real Estate LeasingPricewaterhouseCoopers
Finance Lessor Accounting
Fixed Asset Receivable
= MLPs from the lessor’s point of view
+ unguaranteed residual
– unearned finance income
Net investment in the lease
Gross investment in the lease
Slide 819 October 2005
Real Estate LeasingPricewaterhouseCoopers
Summary
Balance Sheet Income Statement
Finance Lease - Lessee Asset
Lease Obligation
Accumulated Depreciation
Reduction in Lease Obligation
Finance Charge
Depreciation Expense
Finance Lease –Lessor Receivable
Reduction in Receivable
Finance Income
Profit/Loss on Sale
Operating Lease -Lessee N/A Rental Expense
Operating Lease - Lessor Asset
Accumulated Depreciation
Rental Income
Depreciation Expense
Slide 919 October 2005
Real Estate LeasingPricewaterhouseCoopers
Leases involving land and buildings
Need to consider land and buildings individually
Land in principal operating lease (unless title passes)
Buildings decide whether finance or operating lease
Under IAS 17
MLP allocated between Land & Buildings (L&B)
(Separate measurement is not required if land is immaterial or lessee’s interest in
L&B are classified as an investment property)
Slide 1019 October 2005
Real Estate LeasingPricewaterhouseCoopers
Complex issues
Subleases
Sale and leaseback
Linked transactions
Lease and leaseback
Leases between related parties
Sale and leaseback with special purpose entities
Slide 1119 October 2005
Real Estate LeasingPricewaterhouseCoopers
Sale and Leaseback
Sale of Real Estate by the vendor followed by leasing of the same asset to the vendor
Finance Lease Operating Lease
Sales proceeds 100
Carrying amount (80)
20
Defer and amortise over lease term
Sale price = FV
Recognise any profit or loss immediately
Sale price > FV
Defer and amortise excess over period of asset use
Sale price < FV
Recognise profit or loss immediately
If loss compensated by lower future lease payments at below market price defer and amortise it in proportion to the lease payments
Slide 1219 October 2005
Real Estate LeasingPricewaterhouseCoopers
Linked transactions
Leases between related parties
True economic substance of the transaction prevails over the legal form
Transactions frequently not conducted at arms length terms criteria for an operating leaseback may not be met
Lease and leaseback
Lease accounting based on the substance of risks and rewards
Up-front lease payment followed by leaseback for shorter periods with annual rental payments
Option to extend the lease
Finance arrangement
Slide 1319 October 2005
Real Estate LeasingPricewaterhouseCoopers
Sale and lease back with special purpose entities
Involves the transfer and leaseback of an asset by the seller, to a special purpose entity (lessor) wholly or partly funded by bank borrowings or debt securities
Accounting treatment of such transactions is complex
Seller could de-recognise the asset unless control substantially all the risks and rewards of the asset
Real Estate Leasing* Real Estate Leasing* TaxationTaxation
Richard GrotendorstRichard Grotendorst - Tax Manager - Tax Manager
*connectedthinking
Slide 1519 October 2005
Real Estate LeasingPricewaterhouseCoopers
Definition under Fiscal Code
Finance lease Art. 7 (7) FC
A lease whereby at least one of the following conditions is met:
The risks and benefits of the ownership of the leased property are transferred to the lessee upon inception of the leasing contract.
The leasing contract expressly provides for the transfer of ownership of the goods subject to leasing to the user upon expiry of the contract.
The leasing term covers at least 75% of the useful life of the leased property (including any extensions of the lease term).
Operating lease Art. 7 (8) FC
Any leasing contract that does not fulfill the conditions to be classified as a finance leasing.
Slide 1619 October 2005
Real Estate LeasingPricewaterhouseCoopers
Fiscal Aspects
Financial lease
The asset is depreciated by the lessee.
The interest expenses are deducted by the lessee.
The building/land taxes are paid by the lessor.
Insurance premiums are paid as agreed between the lessor and the lessee.
Fx gains (losses ) are taxable (deductible).
Operating lease
The asset is depreciated by the lessor.
The lessee deducts the lease instalments.
The building/land taxes are paid by the lessor.
Insurance premiums paid as agreed between the lessor and the lessee.
Slide 1719 October 2005
Real Estate LeasingPricewaterhouseCoopers
Interest deductibility
Two deductibility criteria:
1. Limitation of interest expense
Loans from non-financial institutions (e.g. group companies)
Limits: - NBR reference interest rate (RON)
- 7% (foreign currency)
Non-deductible interest cannot be carried forward
2. Thin capitalisation rules (debt to equity 3:1)
Interest and foreign exchange differences (debts > 1 year)
Non-deductible interest can be carried forward
! The criteria are not applicable to leasing companies (leasing operations only) and to finance leases
Slide 1819 October 2005
Real Estate LeasingPricewaterhouseCoopers
Tax Depreciation (1)
finance leasing - lessee is the owner
Depreciation of the asset at the level of the lessee
operating leasing - lessor is the owner of the leased asset
Depreciation of the asset at the level of the lessor
! The general depreciation rules apply for leasing operations
Slide 1919 October 2005
Real Estate LeasingPricewaterhouseCoopers
Tax Depreciation (2)
Difference between accounting and tax depreciation
Based on useful lives stated in the Catalogue of Fixed Assets:
Buildings (40 – 60 years), technical equipment (commonly 5 - 20 years), office equipment (2 - 6 years)
Land is not depreciable, but costs for land modernisation depreciable (10 years).
Depreciation methods: straight-line (buildings), accelerated, reducing balance
Complex assets (e.g. buildings) may be depreciated by subcomponents
Valuation report by an independent appraiser recommended
For assets acquired after having been partially utilised, useful life could be determined by technical experts
Revaluations are not recognised for fiscal purposes after 1 January 2004
Slide 2019 October 2005
Real Estate LeasingPricewaterhouseCoopers
Leases vs. Rental
Rental contracts have similar profit tax treatment as operating leases
Financing costs are fully tax deductible under leases as no thin capitalisation rules apply and there are no other limitations
Limitation of tax deductibility of financing costs for pure rental operations financed by loans granted by other entities (either group companies or not) or shareholder’s loans based
No option right of tenant to purchase the real estate or minimum value of rented property required as opposed to leases
The rental period could be less than one year while the period of the lease contracts exceeds one year
No authorisation or computation method are required for rental agreements
Slide 2119 October 2005
Real Estate LeasingPricewaterhouseCoopers
Other tax issues
Cross-border leasing – Non-resident owners of Romanian Real Estate
Real Estate leased to residents and Permanent Establishment’s of non-residents
Real Estate leased to non-residents
Potential WHT implications
Local taxes – payable by the owner of the leased asset
Land tax – fixed amount per sqm depending on the location
Building tax - 0.5% to 1% of the building’s value or, if not revalued, between 5-10%
Slide 2219 October 2005
Real Estate LeasingPricewaterhouseCoopers
Potential legislative amendments?
Fiscal Code
Specific provisions as regards Real Estate leasing (operating vs. finance lease)
Tax depreciation of Real Estate investments.
Tax incentives (investment allowance, re-investment reserve).
Law 332/2001 on direct investments with significant impact on the economy
Real Estate leasing to be included.
GO 51/1997 on leasing operations
Define sub-lease.
Establishes a regulatory body on the leasing market.
Real Estate Leasing* Real Estate Leasing* VATVAT
Diana CoroabDiana Coroabaa - VAT Manager - VAT Manager
*connectedthinking
Slide 2419 October 2005
Real Estate LeasingPricewaterhouseCoopers
Leasing-Real Estate
Current treatment
Subject to VAT
EU Accession
Exempt with option to tax
Option to tax the leasing
=> Mandatory taxation of any subsequent transaction (?!)
Slide 2519 October 2005
Real Estate LeasingPricewaterhouseCoopers
Financial leasing
Current treatment
VAT on principal
Interest not subject to VAT
EU Accession
Option to tax
VAT on installments
(principal + interest)
Slide 2619 October 2005
Real Estate LeasingPricewaterhouseCoopers
Adjustment period
Twenty years starting:
from 1 January of the year during which the right to deduct arises, for the construction, purchase, transformation (20%) or improvement (20%) of a building
from 1 January of the year during which the building was first used
Slide 2719 October 2005
Real Estate LeasingPricewaterhouseCoopers
Adjustment method
The adjustment is made once only for the whole period of adjustment still to be covered
The adjustment should be performed on an yearly basis in case the destination of the building is changed from taxable to exempt operations or vice-versa
Slide 2819 October 2005
Real Estate LeasingPricewaterhouseCoopers
Examples of Examples of one - off adjustmentone - off adjustment - 20 years - - 20 years -
Slide 2919 October 2005
Real Estate LeasingPricewaterhouseCoopers
A leasing company purchases a building on 15 December 2007 for the price of 7.140 RON incl. VAT (19% = 1.140 RON). It deducts 1.140 RON. It uses the building for operations with a right to deduct.On 2 February 2009, the company concludes a leasing contract for the building. It does not opt to tax the operation and therefore the leasing will be exempt without a right to deduct.
Solution
Year 1 (2007) is taken into consideration
Year 2 (2008) is taken into consideration
The loss of the right to deduct VAT appears in year 3 (not taken into consideration)
Adjustment in favour of the State: 1.140 RON x 18/20th = 1026 RON to be paid
Example 1
Slide 3019 October 2005
Real Estate LeasingPricewaterhouseCoopers
Example 2
A leasing company purchases a building in 2007 for the price of 11.900 RON incl. VAT (19% = 1.900 RON). It knows it will use the building for exempt operations (i.e. leasing) and does not deduct the input VAT. The company concludes a leasing contract for the building for 5 years starting with 2007 and does not opt for taxation.
In 2012, the leasing company concludes a new leasing contract with another beneficiary for the next 15 years.
Slide 3119 October 2005
Real Estate LeasingPricewaterhouseCoopers
Solution
In 2007 the company is not entitled to deduct the input VAT
In 2012 the company leases the building and opts to tax the leasing => The company must adjust the initial input VAT
The right to deduct VAT appears in year 5 (not taken into consideration)
Adjustment in favour of the Company: 1.900 RON x 16/20th = 1.520 RON
Example 2
Slide 3219 October 2005
Real Estate LeasingPricewaterhouseCoopers
Example 3
A leasing company purchases a building in 2007 for the price of 11.900 RON incl. VAT (19% = 1.900 RON). It knows it will use the building for exempt operations (i.e. leasing) and does not deduct the input VAT. The company concludes a leasing contract for the building for 8 years starting with 2007 and does not opt for taxation.
In 2015, the leasing contract expires and the leasing company decides to sell the building and tax the transaction. The sell price will be, due to unfavourable market conditions, 5.950 RON incl. VAT (19% = 950).
Slide 3319 October 2005
Real Estate LeasingPricewaterhouseCoopers
Solution
In 2007 the company does not deduct the input VAT
In 2015 the company sells the building and opts to tax the transaction => The company must adjust the initial input VAT
The right to deduct VAT appears in year 9 (not taken into consideration)
Adjustment in favour of the Company: 1.900 RON x 12/20th = 1.140 RON , however the deduction is limited to 5.000 x 19% = 950 RON ( the output VAT charged on sale)
Example 3
Slide 3419 October 2005
Real Estate LeasingPricewaterhouseCoopers
Compliance
Main requirements:
The taxable person must keep a list of the capital goods subject to VAT adjustment allowing the control of all tax deducted and adjustments made
This list must be kept during a period of five years after the end of the adjustment
Any other records, documents and books relative to capital goods must be kept during the same period
Slide 3519 October 2005
Real Estate LeasingPricewaterhouseCoopers
In addition:
More information will be included in the VAT return
No longer – standard sales & purchase ledgers
Quarterly recapitulative statements for intra-Community deliveries and acquisitions
Slide 3619 October 2005
Real Estate LeasingPricewaterhouseCoopers
Possible case scenarios after AccessionPossible case scenarios after Accession
Slide 3719 October 2005
Real Estate LeasingPricewaterhouseCoopers
2 operations:
Leasing – service: Taxable (option)
VAT on each installment (principal and interest)
No input VAT adjustment
Local supply of immovable goods at the end of the leasing contract (if option exercised): Mandatory taxation (?!)
VAT on the sale price
ROMANIANLEASING
COMPANY
ROMANIAN CLIENT
Leasing with option to tax
Delivery of goods
Slide 3819 October 2005
Real Estate LeasingPricewaterhouseCoopers
Leasing – service: VAT exempt
Leasing company must adjust the input VAT initially deducted in relation to the building, if any
One – off adjustment method
ROMANIANLEASING
COMPANY
ROMANIAN CLIENT
Leasing without option to tax
Slide 3919 October 2005
Real Estate LeasingPricewaterhouseCoopers
Foreign leasing company pays Romanian VAT on acquisition if the immovable property is a new building
Leasing – service: VAT exempt
Foreign leasing company does not have to register for VAT purposes in Romania
FOREIGNLEASING
COMPANY
ROMANIAN CLIENT
Leasing without option to tax
Romanian supplier
Acquisition of new building
(VAT)
Slide 4019 October 2005
Real Estate LeasingPricewaterhouseCoopers
Foreign leasing company pays Romanian VAT on acquisition if the immovable property is a new building or if the supplier opts to tax the transaction
Leasing – service:
Taxable
Romanian VAT on each installment (principal and interest)
Foreign leasing company has to register for VAT purposes in Romania and is entitled to deduct the input VAT on acquisition
FOREIGNLEASING
COMPANY
ROMANIAN CLIENT
Leasing with option to tax
Romanian supplier
Acquisition of immovable property
(Exempt with option to tax)
Slide 4119 October 2005
Real Estate LeasingPricewaterhouseCoopers
PricewaterhouseCoopers services
Training
Pre-accession review (included tailored training)
Pre-accession Forum
Slide 4219 October 2005
Real Estate LeasingPricewaterhouseCoopers
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