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Leasing was introduced in Germany in 1962 when the first leasing company was set up. At the end of 1993, more than 1700 leasing companies were registered. However, only about 100 of these are larger companies.

Leasing has made rapid strides in the German market. Starting with a penetration ratio of merely 5% in 1980, it rose to 10% in 1988. The growth rates in leasing have been in excess of the general growth rate in GDP for a long time.

The major constituent of German leasing market is the automobile segment. Almost half of the total industry volumes are taken by the auto leasing segment.

The local leasing association is called Bundesvarband Deutscher Leasing-Gellenschaften e.V. (BDL).

Legislation does not provide a definition of leasing. Leasing contracts are regarded as either a rental contract or an installment sale. To qualify as a rental contract (preferable for tax purposes), it is decisive whether or not the economic ownership is transferred to the lessee.

Usually the lessor is entitled to capitalisation and depreciation of the leased asset. However, if the economic ownership is transferred to the lessee, the lessee will show the asset in his balance sheet and the lessee is entitled to depreciation.

The definition by Tax Law of economic ownership ('the economic owner has the exclusive use of the asset for its normal useful life in such a way that the holder of the legal title is excluded from using the asset') underlies several principal regulations by the tax authorities. Pursuant to the "Full pay out Decree" (1971), a Finance Lease does not affect the economic ownership of the lessor if the fixed leasing period is at least 40% and does not exceed 90% of the useful life of the asset. On top of that, purchase options and extension options should cover the remaining book value or the lower market value.

The "Non full pay out Decree", (1975) lays down that neither a put option of the lessor to the lessee for a predetermined fixed price, nor an obligation of the lessee to compensate the lessor for a Sales-loss after expiry of the lease period, endangers the position of the lessor as economic owner. If, however, a sale after expiry of the lease results in a gain, the lessor, as economic owner, is to receive at least 25% of the excess (the balance of 75% to be received by the lessee). Also in the case of a cancelable contract, pursuant to which the lessee is obliged to make a final payment to the lessor (covering the difference between total cost to the lessor and rentals paid, reduced by 90% of the Sale-proceeds received by the lessor), the lessor remains the economic owner. These three non-full pay out categories assume a non-cancelable lease period of at least 40% and not exceeding 90% of the tax life of the asset.

Tax treatment of leasing contracts follow accounting principles. Leased assets are depreciated by the economic owner in accordance with Official Depreciation Tables ("AFA"). When the leased assets are capitalised by the lessor, lease payments are a fully tax deductible expense for the lessee. If the lease is "on balance" for the lessee, only half of the interest paid is tax deductible. This explains the tax driven character of leasing in Germany.

V.A.T. at the rate of 15% is due on the lease payments if a contract is to be classified as a Rental contract. In other cases, 15% V.A.T. is payable by the lessee upon delivery of the equipment on the arithmetic sum of all rentals payable.

A striking feature of leasing in Germany is the "Forfaitierung" system. This system has been adopted by Leasing companies to avoid funding of leasing portfolio's by long term loans which, generally, lead to increased tax on both income and capital. Therefore, lease rentals are sold to banks (exempt from these trade taxes) on a non-recourse basis at the Discounted Present Value.

The following news about recent ruling about applicability of VAT on a cross-border lease transaction was contributed by Mr. Ulrich Eder, DUE FINANCE Duesseldorf:

The viewpoint of this legal opinion also applies to similar situations.