Irina R. Duhn
Candidate of Economic Sciences
Plekhanov Russian Economic University
SALE-AND-LEASEBACK
Leaseback transaction starts when an asset owner first sells the asset to
the future landlord, and then leases it back from the buyer, i.e. one and the same
party acts as a seller and a lessee at the same time. At the result only the asset
owner changes, but the user remains the same, while being provided with
additional assets.
Thought it is not correct to fully equate sale-and-leaseback with acquiring
assets secured upon a property loan, as the loan itself is not formalized.
These two absolutely different transactions may only be compared formally. Entrepreneurs
should be very careful when entering into a sale-and-leaseback deal, as it
presupposes the loss of property.
Leaseback arrangement makes it possible for entrepreneurs to release the
restricted equity via property sale and to keep on actually using it on a
leasehold basis. This type of lease is successfully being applied for refunding
capital investments, especially in those cases, when companies face financial
difficulties, and leaseback helps them to overcome delinquencies and to resume
production process or modernize production and gain their competitive ability.
Sale-and-leaseback is widely used by initial landlord for the following
purposes:
-
tax concessions – utilization of own equipment without
converting it into lease, makes it possible to reduce taxable income
considerably by means of allocating lease payments to the prime cost of output
products (provided services or works);
-
more efficient utilization of raised investments if necessary – into building
up fixed assets or increasing current capital, unlike finance lease which
restricts the sphere of their application with capital stock;
-
reequipment of companies with new technological hardware
and tools – after purchasing new equipment and diverting considerable funds
from turnover the company receives the expired costs from the leasing company,
at this preserving the property and utilization right for such equipment;
-
balance adjustment by way of selling own movable and real
property not at a balance cost, but at a usually leading market cost.
Due to ownership for provision belongs to the leasing company, this
financing method is less risky for the company, and much more profitable for
the client as compared to a commercial loan, at the expense of tax optimization.
The advantage of the sale-and-leaseback compared to the traditional
lease is in the fact that the company makes a contract not with the aim of
obtaining any specific equipment, but with the aim of receiving financial
resources, which it may use at its own discretion for any purchases.
Bookkeeping balance sheets and other documents that are usually required
by banks to find out client’s repayment ability are not necessary to be provided
when making a leaseback contract. Moreover, it should be kept in mind that when
making a regular lease contract lessee may often be committed to pay up to 30%
from the cost of lease property. Sometimes companies are not able to find such
money, while when taking into leaseback its own equipment the company can
acquire new equipment for the proceeds (or at least use them as part of payment
for the equipment purchased on credit or upon another lease contract).
Unlike the interests on bank credit (which is obtained for the same
reason) lease payments are fully included into expenses for profit taxation
purposes without any rate fixing.
For estimation of risks on sale-and-leaseback, it is first of all
necessary to calculate all tax consequences, in the first place – value added
tax (VAT). If lessee (in our case – also seller) is not a VAT payer, then this method
of obtaining current assets is unreasonably expensive for him.
Leaseback contract requires a well-balance approach and is more risky
way of fund raising in comparison to a bank credit, but this risk may be
compensated by easiness of obtaining such funds, their lower expensiveness and
saving on taxes.
Moreover, here we face the necessity to intelligently calculate not only
a single transaction, but a complete complex of economic relations, as well as
planning of company cash flows as a whole, as in case of selling hardware
company obtains current assets, it will most probably aim them at the purchase
of stock material, expendables, payment for services from third-party companies.
If payment for such expenses already includes VAT, the “pass-through” essence
of this tax will allow conjoin the amounts of incoming and outcoming VAT
without any financial losses. The same payments will became expenses of the
company, and accordingly reduce taxation base subject to profit taxation, it is
only needed to plan promptly flows of sales revenue and necessary expenses in
one taxation period.
Sale-and-leaseback utilization may be especially effective during
periods of company massive modernization. For example, if you decide to equip your
auto repair shop with new hardware and tools, direct financing of some
absolutely necessary items will probably turn out to be quite difficult.
Problems may emerge with complex equipment which is being produced upon special
order; with leasing items, which require long-term assembling period; with
numerous small details, without which repair area operation cannot exist. Search for a suitable financing variant for
all these things separately may take quite a long time. And transaction will
look completely different, if leasing item will be represented as a complete
material complex including the “filling”. Having grouped all these at your balance,
you will be able to refinance expenses with the help of leaseback and use the
emerged funds for further development, such as purchase of component parts,
personnel training, promotion and marketing.
Of course, such kind of transactions requires profound consideration of
not only those taxation aspects, which were mentioned above, but also a
large-scale planning of all the cash flows, otherwise there is no reason of
qualifying leasing as a hi-tech financial tool if not using it with solid
intelligence and good deliberateness.
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