In contrast to the “classic” lease agreement, leasing contracts have always been a challenge in accounting practice. Operating leases, finance leases or special leases, partial or full amortization agreements, and the use of call options often make it difficult for accounting practitioners to determine who has to account for the leased asset – the lessor or the lessee.
The leasing decrees of the Federal Ministry of Finance as a guideline for accounting
With four leasing decrees from the period 1971 to 1991, the Federal Ministry of Finance (BMF) has conclusively clarified the attribution of the leased object to the lessor or lessee. Under commercial law, these requirements were followed.
Commercial law assessment as a guideline for VAT law
The appropriate treatment of leasing contracts is not only a commercial law issue, but also a VAT law issue. The question to be answered is whether the leasing contract leads to a supply or to another service for VAT purposes.
Until now, it was assumed in Germany that a leasing contract in which the lessee (user / beneficial owner) has to account for the leased object leads to the leased object being delivered to the lessee for VAT purposes at the beginning of the contract term. However, if the lessor (owner under civil law) balances the leased object, then another supply is assumed for VAT purposes.
Delivery vs. other services – significant VAT consequences!
Whether a supply or other service exists has considerable VAT consequences:
- In the case of a delivery, the VAT liability arises in full at the time of conclusion of the contract.
- In the case of any other service, the VAT liability arises in installments over the term of the contract.
- The determination of the place (in cross-border situations) where a transaction is taxable differs in the case of supplies and other services.
- In the case of cross-border other supplies, there is a change of VAT liability (sec. 13b of the German VAT Act).
ECJ and Federal Ministry of Finance: Change in the legal opinion on the VAT assessment of leasing contracts
After the ECJ abandoned its previous legal opinion on the VAT assessment of leasing contracts with its judgment of 04.10.2017 (Case C-164/16), the Federal Ministry of Finance (BMF letter of 18.03.2020) has now answered the question of whether there is a supply or another service for VAT purposes.
New view of the Federal Ministry of Finance: VAT treatment of leasing contracts
In the case of a leasing contract, a supply is considered to be a supply for VAT purposes if the following two conditions (cumulative) are met:
- The leasing contract must contain a clause (e.g. purchase option) that the leased object is transferred to the lessee at the end of the contract term.
- It is clear from the terms of the contract, which must be assessed objectively at the time of signing the contract, that ownership of the leased object is to be automatically transferred to the lessee if the contract is performed according to plan.
In the view of the Federal Ministry of Finance, the second requirement is fulfilled if, on the basis of the terms of the contract, the exercise of the purchase option appears to be the only economically rational option for the lessee. This is the case if the lessee has de facto “paid/amortized” the leased object in full through his leasing instalments and he does not have to pay any or no significant sum (max. 1% of the market value at the time of the option) as a purchase price.
In all other cases, there is another service .
Far-reaching consequences for practice
First of all, the all-clear can be given to the effect that leasing contracts concluded before 18.03.2020 do not have to be reassessed. However, new contracts (from 18.03.2020) must be assessed under the application of the new VAT requirements.
In future, the BMF’s leasing decrees will no longer be an (exclusive) criterion for the VAT assessment (supply vs. other service) of leasing contracts. In this respect, commercial/income tax law and VAT law will go their separate ways.
Against the background of the quite considerable effects on the VAT liability and the input tax deduction, the assessment of whether a supply or other service exists should be carried out conscientiously and with the necessary care.
We will be happy to support and advise you in the assessment of leasing contracts. Contact us if necessary!
What challenges do you see in the new BMF view on the VAT treatment of leasing contracts? We look forward to your comments.
Image source: Adobe Stock, Photographer: adiruch na chiangmai
