Equipment leasing is a way in which businesses acquire equipment used in their trade. Another manner is equipment financing. To finance a piece of equipment means to take out a loan to buy it. The lender takes a security interest in the equipment, meaning that the equipment is collateral for the loan. Equipment leasing means renting the equipment instead of buying it.
Romanian businesses and individuals frequently lease equipment and goods instead of buying them. A lease is often better than a purchase because it allows the lessee to avoid tying up a large amount of capital. Leases are particularly popular where the item may have a relatively short useful life or where the technology is changing rapidly, such as with computer hardware.
Equipment leasing operations in Romania are regulated by Government Ordinance no. 51/1997 as it has been republished and further amended, supplemented by Law 571/2003 regarding the Fiscal Code, as it has been further amended and supplemented, as well as by Government Ordinance no. 28/2006 regarding non-banking financial institutions.
Under recently adopted Law 287/2006 amending Government Ordinance no. 51/97, Romania’s leasing legislation has been restructured so as to ensure the harmonization of the Romanian leasing market with the banking market, and bring Romanian law in line with the European Union Acquis.
All the amendments denominate financial leasing in the category of credit activities governed by Government Ordinance no.28/06. This ordinance represents the first legal recognition of leasing as a credit financial service among other similar services such as consumer credit, mortgage credit, factoring, and so on.
The ordinance defines these companies as non-banking financial institutions and designates the National Bank of Romania as the authority over the supervision and monitoring of leasing activities. The legislation represents a major change in the leasing business in Romania.
Special Regulations Regarding Leasing Companies
Only Romanian legal entities may carry out leasing operations in Romania. According to Government Ordinance no. 28/06, non-banking financial institutions such as leasing companies must be established in the form of joint-stock companies, organized in accordance with the provisions of the Companies Law no. 31/1990.
The minimum share capital of a non-banking financial institution is determined by the National Bank of Romania, but it cannot be lower than the RON equivalent of €200,000 (art. 19 from Government Ordinance no. 51/97).
In order to ensure the most efficient supervision of leasing activities, several requirements have been introduced by Law no.
287/2006 such as: the obligation of leasing companies to be audited by auditors who are members of the Romanian Chamber of Financial Auditors; the obligation of such companies to lodge regular reports with the National Bank of Romania and also the right to review banking-risk information (defined by the NBR Regulation no.
4/2004 as being the information reported by the credit institutions in relation to all risks they incur from debtors), etc. In turn, leasing companies operating in Romania must report to the Banking Risk Center of the National Bank of Romania all relevant information related to banking risks arising from the leasing operations performed by them.
For the protection of the lessee, the Law provides that where a lessor is subject to reorganization or bankruptcy proceedings, all of the lessee’s rights deriving from the leasing agreement will remain opposable to the syndic judge and also to the creditors of the lessor, hence they must uphold the leasing agreement.
Special Regulations Governing Leasing Agreements
Equipment leasing implies a tripartite structure: the lessor of the equipment, the lessee user and, of course, the supplier of the equipment. This represents an alternative to the classic method of sale-purchase of goods with the payment of the price in installments.
Therefore, the lessor transfers to the user for a definite period of time, the right of use over the equipment which is the property of the lessor, in exchange for regular payments, called the "leasing installment". Law 287/2006 provides for the possibility of the lessee concluding a sub-lease agreement over the same object with another person acting as an end user.
Such a contract may be concluded only with the lessor’s prior written approval and is conditional upon the fulfillment by the lessee of the requirements imposed upon leasing companies. The leasing agreement may not have a term of less than 1 year.
Under an agreement, the lessor must undertake that at the end of the leasing period, it shall comply with the user’s right to opt for one of the following: the acquisition of the asset, the extension of the leasing agreement or the termination of the contractual relations.
In the event that the user should choose to acquire the leased equipment at the end of the lease term, the transfer of the right of ownership will be made in exchange for a cash payment known as the "residual value".
A particular form of leasing is the leaseback or sale/leaseback method. This leasing method implies a lease by a company of industrial equipment that it owns to a leasing company in order for it to be used in a new leasing operation with the obligation to later redeem such equipment.
Leasing operations may have as their object immovable goods, as well as movable goods for a long-term use, with the exception of audio and video recordings, theatre plays, manuscripts, patents and copyrights.
In the event that the right of ownership over the equipment is not ultimately transferred, the period of use of the equipment in a leasing system must cover at least 75% of its normal period of use.
Both Government Ordinance no. 51/97 as further amended by Law 287/2006 and the Fiscal Code regulate two categories of leasing operations: financial leasing and operational leasing. To be included in the category of financial leasing, a leasing operation must meet at least one of the following requirements:
• the risks and benefits related to the ownership right pass on to the user at the moment that the lease agreement comes into effect;
• the parties expressly provide that upon expiration of the lease agreement the right of ownership over the equipment will be transferred to the user; or
• the lease period exceeds 75% of the normal period of use of the asset.
By comparison, an operational leasing is defined to be any leasing agreement that meets none of the above-mentioned requirements.
However, commencing on January 1, 2007, the above quoted provisions of the Romanian Fiscal Code regarding financial leasing will be amended as follows:
- the lessee shall have the option to buy the asset at the date the lease agreement expires for a residual value that must not be higher than the difference between the maximum normal period of use and the duration of the leasing agreement as related to the maximum normal period of use;
- the total value of the lease installments without the auxiliary expenses is higher or equal to the value of the asset when the lease was executed; or
- the lease period exceeds 80% of the normal period of use of the asset (and not 75%, as currently set forth)
- the risks and benefits related to the ownership right pass on to the user at the moment the lease agreement comes into effect ; or
- the parties expressly provide that upon expiration of the lease agreement the right of ownership over the equipment will be transferred to the user.
The new leasing regulations define lease installments as related to either financial leasing or operational leasing as follows:
• for financial leasing, the installment must be computed as a quota of the asset’s entry value plus the leasing interest as set by the parties; and
• for operational leasing, the installment shall be determined by mutual agreement of the parties.
According to Law 287/2006, to avoid any doubt, all lease agreements must contain a clause defining explicitly whether the agreement as a financial or an operational leasing contract. The obligation to insure the leased assets must be included in a provision in the lease agreement incurring such liability either to the lessee or to the lessor.
Also, Law 287/2006 extends the enforceability of lease agreements to all personal and real securities used to guarantee fulfillment of the obligations under the equipment lease agreement.
Customs Fees Incurring for the Leased Assets
Equipments brought into the country by Romanian users (either individuals or legal entities) on the basis of lease agreements concluded with foreign leasing companies, fit into the framework of the customs regime of temporary admission for the entire duration of the lease contract.
Therefore, a total exemption from payment of the amounts related to import including customs sureties is granted in relation to such movable goods.
Equipments that are brought into the country by Romanian leasing companies on the basis of contracts concluded with users that are either Romanian individuals or Romanian legal entities fit into the framework of the import customs regime, and are also exempt from the payment of the amounts related to all import rights.
In case the goods brought into the country by either one of the two methods set forth above are ultimately acquired by the users, they are obligated to pay the relevant customs fee as determined in relation with the residual value of the equipment at the time of conclusion of the sale-purchase agreement, which may not be less than 20% of the entry value of such goods.
The movable goods that are the object of a lease agreement concluded between a Romanian lessor (legal entity) and a foreign lessee (either natural or legal entity) and which are exported from Romania on the basis of the such a lease agreement shall also remain under the customs regime of temporary admission on the entire duration of the agreement.
Any subsystems or parts brought into the country by leasing companies for the purposes of manufacturing goods that are to be the object of leasing agreements are exempt from the payment of customs fees and the value added tax.
Leasing from a Fiscal Point of View
Under the provisions of the Romanian Fiscal Code, in the case of financial leasing the user is considered the owner; while in the case of operational leasing the lessor is the one considered to hold such capacity.
Monthly lease installments are treated differently from a fiscal point of view depending on whether they are financial leases or operational ones, as follows:
- financial lease installments represent a part of the purchase price and so the lessee must deduct the relevant interest; and
- in the case of operational leases, such an installment would represent the rent paid in exchange for the usage of the goods and hence be deductible as a royalty by the lessor.
The incomes obtained by non-residents as either interest or lease installments, as set forth by the contracting parties through a financial or an operational lease, as the case may be, are subject to taxation in Romania by way of withholding, in accordance with the provisions of the double taxation treaties or internal legislation, where applicable.
Some leasing operations are included in the scope of the application of the value-added tax (the VAT). The import of goods is also included in the scope of application of VAT. Such operations are generally referred to as taxable operations. The applicable rate of the value-added tax is the rate in force on the date when the generating event for the value-added tax occurs. The current VAT rate as set forth in the Romanian Fiscal Code is 19%.
What the Future Holds for Leasing in Romania
A main objective of the Romanian Government is the harmonization of respective Romanian legislation with European Union requirements. The current provisions of the Romanian Fiscal Code do not cover the IAS17 standards which relate to leasing in a very detailed manner.
Consequently, operational leases have suffered from fiscal mistreatment with a direct effect on the total volume of such operations in the country. The fiscal definition does not follow the accounting one related to financial and/or operational leases.
It may be a direct explanation of the fact that operational leases represent around 1.5% out of the total leasing agreements on the Romanian market. It is also expected that the new legislation related to the supervision of this market will have a direct impact on this aspect.
The leasing ordinance implies the possibility that the National Bank of Romania could issue norms that may limit the level of operational leasing agreements for authorized financial lease companies.
Such a norm will definitely divide the players into two types of authorized leasing companies: financial leasing companies acting strictly under the rules and norms of National Bank of Romania and the operational leasing companies that will remain under the governance of commercial legislation.
As a consequence of the still unclear fiscal and accounting treatment, the leasing business has shown a lack of interest in developing real estate leasing. The current domestic legislation provides no specific rules for real estate leasing, which is treated like any other leasing transaction.
Romanian leasing-related authorities have focused on redefining for tax purposes financial and operational leasing for the purpose of creating a better and clearer distinction for to avoid the risk of re-classifying an operational lease as a financial one and vice-versa. An updating of the Fiscal Code in this regard is expected to enter into force once Romania joins the EU.
Since only the financial leasing market falls under the direct authority and control of the Romanian Central Bank, these businesses must to take into consideration and follow the National Bank’s prudential banking rules.
Consequently, in order to eliminate the differences between the applicable fiscal regimes, the Ministry of Public Finance should treat all financial leasing operations as benefiting from the treatment afforded by banking legislation to credit operations.
The harmonization of the VAT legislation is expected to be beneficial for all leasing operations but especially for real estate leasing. If the Romanian VAT law is amended, as has been recommended, in accordance with the EU Directive on VAT, the tax burden for the lessees would be greatly eased as they would not have to pay VAT for financial and operational leasing of real estate.
The expected harmonization of this legislation as well as other provisions that are expected to be harmonized with European Directives (for example: adjustment rules for immovable property) are expected to make real estate leasing, both financial and operational, more attractive for the Romanian leasing market.
Romania’s accession to the EU should bring large corporate, multinational customers into the country and specific leasing products will have to be offered to those who already have a portfolio history with present leasing companies in Romania.
This is one very good reason why most of the important players on the market are strongly lobbing for the quick harmonization of all Romanian leasing legislation.
The article "Equipment Leasing in Romania" was published based upon approval of:
Rubin Meyer Doru & Trandafir
SOCIETATE CIVILA DE AVOCATI / LAWYERS PROFESSIONAL CORPORATION
IN ASOCIERE CU / AFFILIATED WITH HERZFELD & RUBIN, P.C.