Finansiell leasing av lös egendom slutbetänkande

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Financial

leasing

of movable property

Summary

Final report of the Commission Leasing

Financial Ieasing of movable property Summary

Fina| report of the Leasing Commission

Summary

The Leasing Commission has been asked to investigate issues relating to the leasing of movable and immovable property. This report concludes the Commissions work. In November 1991, a partial report was presented, which discussed mainly so called sale and lease back of immovable property Property leasing, Sale and lease back, SOU 1991:81. The report now being presented deals primarily with issues relating to civil law, tax law and, to a certain extent, accounting issues in connection with financial leasing of movable property. The final report consists of two principal sections. The first section Chapters 2 to 9 contains descriptions and analyses of existing conditions. This includes partly concepts, definitions, forms and terms of agreements, development and scope Chapters 2 and 3, partly existing legal premises from the point of view of civil law, accounting and tax law Chapters 4 to 6, partly the advantages and disadvantages from various aspects Chapter 7 and partly the civil law regulations applicable in certain other countries and under the 1988 Convention on international financial leasing Chapters 8 and 9. The other principal section Chapters 10 to 13 gives an account of the considerations and recommendations made by the Commission. In the field of civil law, these considerations have resulted in bills both on financial leasing as between enterprises Chapter 10 and on consumer leasing Chapter ll. Having regard to the ongoing work carried out by others concerning accounting and related tax aspects, no recommendations are presented in this area. As regards taxation, however, an outline given of the measures which may and should be considered when the said ongoing work has been concluded. This summary deals mainly with the considerations and

recommendations of the Commission.

The importance of financial leasing of movable property as between enterprises

Financial leasing an important form of financing the acquisition of fixed assets both in Sweden and abroad. The leasing activities of Swedish finance companies are estimated to account for about 20% of the financing of investments by industry and commerce. The book value of the leasing volumes reported by the finance companies at the end of 1993 totalled about 36 billion Swedish kronor. To this amount should be added the leasing transactions financed by industry itself, the volume of which estimated to be equivalent to that of the finance companies. The total outstanding leasing volume can be estimated at more than 100 billion Swedish kronor. Financial leasing of great significance to the Swedish export industry. Nationally utilised by enterprises of all sizes as well as by municipalities, government authorities and public utilities. However, domestic leasing particularly important as a capital source for small and mediumsized enterprises. Financial leasing may represent one of few possibilities for small businesses to establish themselves and obtain financing for necessary investments. The objects of financial leasing are found among all types of movable property of reasonably permanent value, such as ships, aircraft, buildings, turbines, manufacturing machinery, forest and agricultural machinery, paper machinery, construction machinery, trains, underground carriages, lorries, motorcars, telecommunications offices, communication equipment, computers, various kinds of equipment, intangible rights etc.

Considerations of the need for civil law regulation of national financial leasing as between enterprises

Financial leasing typically produces certain advantages and disadvantages as compared with related forms of finance. The advantages to the lessee frequently consist of the possibility to obtain financing, where financing cannot otherwise be had, and to a certain extent of accounting and tax advantages. The disadvantages to the

lessee and his creditors are to a great extent defined in tenns of civil law and are ultimately based on the absence of clarifying and balanced rules of law for this type of agreement. The advantages to the lessor are found mainly in the tax treatment, in the flexibility of leasing as a form of financing and in the absence of rules of law, as a consequence of which the lessor, for instance, may frequently, without any major restrictions, enforce the terms of Contract which he himself has devised. The relative disadvantages to the lessor consist mainly of the risk inherent the financing of enterprises with poor Iiquidity and/or solidity, and to a certain extent in the uncertainty implied by the absence of legislation in the event of the validity of the leasing terms being tested in a court of law. As a consequence of the uncertainty resulting from the absence of legislation on financial leasing, the outcome of legal disputes difficult to predict as regards for example the equitableness of the terms of an agreement and the treatment of a leasing agreement on the bankruptcy of the lessee. The uncertainty constitutes an inconvenience primarily for the lessee, but may sometimes be of disadvantage to the lessor as well. The absence of leasing legislation must be regarded as being doubtful from a legal rights point of view, especially when considering the fact that in many important leasing issues there no guiding case law based on decisions of the Supreme Court. For a long time, the formulation of the type of agreements represented by finance leases has been governed by the standard terms of the finance companies. During the more than thirty years that this form of financing has bcen established in Sweden, these terms have shown no significant development as regards balance and equitableness. There are still a number of important terms which must be considered unfair as such, the lessor were to apply them literally. ln many matters, for example, the lessor has the sole or arbitrary right of judgement, and leasing agreements often contain terms which are very hard on the lessee, especially as regards the circumstances entitling the lessor to remedies on a breach of contract by the lessee. The fact that the lessor does not always, in the event of a dispute, apply the terms in full, does not mean that the severity of the terms without significance. In the law of property, not considered to be acceptable from a legal policy aspect to abandon one

party to an agreement to the discretion of the other party, especially the first party an inferior position. A party should be able to rely on legally founded powers, and stronger party does not a usually invoke a severe clause, he should not, principle, be able to do so against a certain party or in a certain situation. A selective application of a harsh clause in a bankruptcy or other insolvency settlement will be in conflict with general principles of rights in rem. The fact that the lessor in a dispute frequently does not apply the terms literally, does not mean that he does not do so at other times, which may mean that the lessor on most of its leasing stock may obtain performance, which beyond the acceptable. This particularly grave when comes to those items of the agreement which are economically decisive for the lessee, such as the matter of the size of the rental or a variation thereof or the matter of the damages the lessor can claim on a lessees breach of contract. Furthermore, the nature of certain matters in a leasing relationship such that these matters are difficult to settle effectively by contract or to solve by case law. This typical for example of the parties rights and duties in a tripartite relationship, which typical of financial leasing. The matter of protection of real rights as regards leasing agreements cannot be resolved at all by agreement and regarded as uncertain whether can be resolved by case law. Furthermore, does not seem possible to create, either by agreement or by case law, specially adapted or clarifying rules for financial leasing as a special class of contract. In my opinion, a regulation in civil law of financial leasing should come about, mainly to reduce the present legal uncertainty and to create a firmer basis for the assessment of the equitableness of leasing terms. In the first instance, legislation should include rules under the law of contract regarding financial leasing as a special class of contract, and should be otpional in regard to the relationship between the parties. In certain matters, however, mandatory rules in the lessees favour should be implemented. The issues relating to the treatment of a leasing agreement in the event of the bankruptcy of the lessee and the lessees legal position as regards real rights should also be clarified through rules which are mandatory in favour of the creditors.

In the final report, l present a bill on financial leasing, which

contains rules of the said purport. l will describe below the content of the law.

Swedish accession to the 1988 Unidroit Convention

By the 1988 Unidroit Convention on international financial leasing, an attempt has been made to remove certain legal impediments to

international leasing transactions so called cross-border leasing for

the purpose of increasing the international usefulness of leasing. The convention contains primarily uniform material rules, but also certain rules on the choice of law. limited to certain fundamental issues which are specific to financial leasing. The basic idea to separate financial tripartite leasing from the conventional rental agreement, a conditional sale and a credit sale agreement by giving the transaction its own legal "infrastructure". Here, and by the limitations and definitions of the convention, the primary purpose has been that financial leasing should be recognised in as many countries as possible and that the risk of civil law reclassification into some other type of contract should be minimised. The background and content of the convention are commented in Chapter 9. Apart from purely treaty law provisions, the convention comprises fourteeii articles. The first six articles give definitions, rules on the sphere of application and certain general provisions. The following eight articles contain the actual material rules. The whole convention can be contracted out of all three parties the supplier, , the lessor and the lessee agree. If the parties accept the convention, mandatory three matters, but optional in other respects. Rules on the choice of law are provided on such issues as whether the equipment has become a fixture to or incorporated in land and whether public notice required to protect the lessor against the lessees creditors. Uniform material rules are provided on the matters of the lessors freedom from liability in respect of the equipment, the lessors liability for legal faults, the lessees duty to take proper care of and return the equipment, the lessee°s right to make claims under Sale of Goods law directly against the supplier, the lessee not being

bound by the lessors and the suppliers amendments to the supply agreement, the lessees right to remedies against the lessor in the event of errors and delays in supplying the equipment, the lessors right to remedies on the lessees default and the parties right to dispose of their rights under the leasing agreement. The Convention does not apply to Consumer leasing, sale and lease back or any form of real property leasing. intended for financial tripartite leasing of equipment between enterprises. The Convention has not entered into force when the final report presented. However, the third ratification required has taken place recently, and the Convention expected to enter into force at the end of 1994 or the beginning of 1995. When the Convention enters into force, will become immediately applicable in three states, namely France, Italy and Nigeria. As and when the Convention Comes into force, expected that several other states will accede to it. At present thought that, for example, China and the USA are about to accede. appears from the Commissions review of the Convention that does not contain any rules which are unacceptable from a Swedish point of view. The provisions of the Convention are Consistently well balanced and Carefully considered, both in the choice of regulated

issues and presCribed solutions. Although the Convention naturally

contains a balance between different legal systems, does not deviate greatly from the rules that may be presumed to apply to financial leasing in Sweden. On several issues the Convention contains mediating solutions, the aim of which to achieve as broad aCCession as possible. I recommend that Sweden should accede to the Unidroit Convention. The actual implication of my recommendation that the material rules of the Convention should be included in Swedish law by incorporation and should thus be applicable as Swedish law in the original languages of the Convention, English and French. This will

be implemented by means of a new Act on international financial

leasing. An official Swedish translation will be included as an annexe to this Act.

The Unidroit Convention as a model for Swedish rules

of law

The aims and purposes of the Unidroit Convention correspond largely to the reasons which in my opinion justify a Swedish regulation by law of financial leasing. The direction and drafting of the rules of the Convention are also in line with my idea of how a framework of fundamental rules on financial leasing should be designed in circumstances relating to enterprises. The solutions presented by the Convention are well balanced and directed at issues of central importance this type of agreement. There are important reasons in favour of Swedish leasing transactions not following a different and less predictable set of rules than that which applied when a Swedish lessor or lessee concludes an agreement with a foreign counterparty. Uniform rules also make easier for foreign lessors to operate in Sweden, thus promoting competition in the Swedish leasing market. ln the light of what has been said above, among other things, the rules relating to the law of Contract, which proposed to include for purely Swedish leasing transactions, have been drafted in close conformity with the provisions of the Unidroit Convention.

Bill on financial leasing

Thus, proposed the final report that a new Act on financial leasing hereafter referred to as the Leasing Act be enacted. The Leasing Act can be said to have four main chapters, namely l Introductory provisions giving rules on the sphere of application, definitions and limitations, 2 rules under the law of contract governing the relationship between the parties, 3 specific rules on the treatment of the leasing agreement in the event of the bankruptcy of the lessee and 4 rules on the protection of the lessees rights as against third parties. The content of the Leasing Act summarised below.

Sphere of application The Leasing Act applies generally to the financial leasing of all

personal property, except site leasehold rights and buildings situated on the land owned by another party. The rules on the protection of the lessees rights as against third parties, however, refer only to movable property, which does not consist of a registered ship or aircraft. The Leasing Act shall not apply to sale and lease back transactions, consumer leasing or international leasing transactions governed by the bill on international financial leasing. Some analogous application presumed in respect of the rules relating to the law of contract as well as real rights.

Definition of financial leasing

As in the Unidroit Convention, financial leasing according to the Leasing Act a tripartite transaction between a supplier, a lessor and a lessee. The lessor acquires the equipment from the supplier in accordance with a supply agreement and grants possession of the equipment to the lessee in accordance with a leasing agreement. The definition in the Leasing Act covers both so called indirect and direct triangular leasing. The definition requires that the lessee granted an opportunity to approve those terms of the supply agreement, which concern its interests, that the lessor does not select, specify or supply the equipment and that the lessee°s financial commitment calculated so as to cover the whole or a substantial part of the acquisition cost of the equipment.

Leasing agreements with options borderline to purchase - A leasing agreement rather than a purchase agreement exists - according to the Leasing Act, even the lessee has the right or obligation to buy the equipment at a predetermined price, provided that the lessor took a considerable interest in the development of the market value of the equipment in relation to that price when the agreement was concluded. Unless the interest of the lessor was considerable, the law on Sale of Goods shall apply. proposed that the same rule shall apply in those cases, where the equipment to be sold or a sales value to be determined at the end of the lease term, and where a settlement to be made against the value of the equipment at the time, as determined in the agreement. These rules

agree in all material aspects with the results of the analysis of existing law made in the final report.

The less0rs right to vary the rental Where the lessor has reserved the right to vary the rental, proposed in the Leasing Act that the lessor shall have the right and the obligation to vary the rental in connection with changes in an offically quoted rate of exchange or rate of interest which has been stated in the leasing agreement. The lessor cannot vary the rental for any other reason, which not connected with the supply of the equipment or an official action intended to affect the public. If the official quotation discontinued or the lessor can show that the reference indicated in the agreement has lost its function in general, the lessor entitled to change to another officially quoted reference, has reserved the right to do so in the agreement. In the event that the change produces a substantial increase in the rental, the lessee shall have the right to buy the equipment at its calculated mathematical residual value at the time of the change. further proposed that the lessor shall have the duty to inform the lessee of any decisions to vary the rental and of any change in the rate of exchange or rate of interest. Any notice of a variation shall state the reason for the variation in such a way that the lessee can verify that the variation in agreement with the terms of the lease. In order to enable such verification, the leasing agreement must state the conditions of a variation and the internal rate of return of the agreement. The rules on the variation of the rental are proposed to be entirely mandatory in favour of the lessee.

The lessees liability to pay, the less0rs freedom from liability and the lessees duty to take proper care According to the proposal, after the equipment has been delivered, the lessee shall stand the risk of his commitment to pay or of any guarantees made to the lessor and shall have the same duty to care for the equipment and the same liability as a lessee in general. The lessor shall not. in principle, be liable to the lessee in respect of the

equipment. These rules are proposed to be optional.

The less0rs Warranty regarding quiet possession If the lessee, in excercising its rights under the leasing agreement. disturbed by someone who has a superior title to the equipment, the lessee shall be entitled to enforce against the lessor the remedies stipulated by the Sale of Goods Act in cases of legal error. This does not apply, however, the claim to a superior right based on an act or omission by the lessee. A superior right shall be equal to an allegation of a superior right, there are reasonable grounds for the allegation. The rules are proposed to be optional.

Rules on the triangular relationship proposed that the rules of the Unidroit Convention on the specific triangular relationship in financial leasing should be included in the Leasing Act without any factual changes. The rules are optional in the Leasing Act, just as they are in the Convention. To begin with, they imply that the suppliers duties under the supply agreement shall be owed also to the lessee, as were a party to the supply agreement and as the equipment had been supplied directly to the lessee. However, the lessee shall not be entitled to cancel the supply agreement without the consent of the lessor. This regulation implies, among other things, that the lessee has suffered a loss as a result of faulty equipment or a delay in delivery, can claim damages from the supplier. further proposed that, the equipment faulty or there a delay in delivery, the lessee shall have the right as against the lessor to reject the equipment or terminate the agreement, in the event that the supply agreement between the lessor and the supplier had entitled the lessee to do so, had bought the equipment from the lessor on the terms of the supply agreement. The lessee shall be entitled to withhold rentals payable until the breach of contract has been remedied. By Contrast, the lessee shall not be entitled to require the lessor to remedy faults, supply new equipment or pay damages. This regulation implies, among other things, that the lessor will stand a certain risk in the event of the suppliers insolvency.

Finally, this chapter provides a rule as to how the lessee will be affected by variations of the supply agreement made by the supplier and the lessor. The rule means that the lessee shall not be bound by such variations, they refer to terms previously approved by the lessee.

The less0rs right to remedies on the lessees default Under the Leasing Act, any default by the lessee entitles the lessor to demand performance and, as the case may be, interest on accrued unpaid rentals. Where the default substantial, and where the lessor by notice has given the lessee a reasonable opportunity to remedy its failure, the lessor further entitled to choose either to require accelerated payment of future rentals, the leasing agreement so provides, or to terminate the agreement, recover possession of the equipment and claim such damages as will place the lessor in the position which would have been, the leasing agreement had been performed in accordance with its terms the "positive contractual interest". The lessor shall not be entitled to recover damages for a loss, which has not taken reasonable steps to mitigate by selling the equipment, in the first place, or leasing to another party. proposed that these rules shall be optional with two exceptions. The implication of the first one that the lessor, upon termination of the agreement, cannot invoke a proviso regarding accelerated payment. The second exception refers to the validity of damages clauses, which shall not apply, they should result in damages signiñcantly exceeding the "positive contractual interest". The regulation agrees in all material aspects with the stipulations of the Unidroit Convention.

The less0r°s right of termination upon an anticipated breach of contract by the lessee The Leasing Act further proposes a special provision regarding an anticipated breach of contract on the part of the lessee. Thus evident that the lessees breach will be substantial, the lessor shall be entitled to terminate the leasing agreement, even before the breach of

contract a fait accompli. However, the lessee can neutralise the

termination by providing, without delay, acceptable security for its

performance. The stipulation has been drafted in close conformity with Section 62 of the Sale of Goods Act and has no counterpart in the Unidroit Convention.

Transfer of rights under the leasing agreement

In accordance with the general principles of the law of Contract, the lessor shall be entitled, according to the Leasing Act, to transfer or otherwise dispose of its rights under the leasing agreement or its right to the equipment, without thereby being relieved of its duties to the lessee. By Contrast, the lessee, as a principal rule, may not dispose of its rights except with the consent of the lessor. there no justification for assuming that the lessees disposal should jeopardise the lessor°s right to the equipment, the lessee shall, however, be entitled to complete the disposal. for example a sub-lease, even the lessor does not consent. The lessee liable for its duties under the leasing agreement after the disposal, unless otherwise agreed with the lessor. The rules on the right of disposal are optional in the relationship between the parties. By Contrast, any term of the agreement limiting the right of transfer shall not be enforcable in a transfer by compulsory auction or the bankruptcy of one party, i.e. in relation to the creditors of either party.

The lessees bankruptcy The proposed Leasing Act also contains rules on the treatment of the leasing agreement on the bankruptcy of the lessee. In conformity with the rules on a purchase or leasing of premises, the lessees estate in bankruptcy entitled to replace the lessee as a party to the leasing agreement, while the lessor entitled to ask the estate whether wishes to enter into the agreement and to receive a reply within a reasonable period of time. the estate exercises its right, becomes a party to the agreement and the lessors claims become claims against the estate as such in respect of the period after the receiving order. Even the bankruptcy estate does not enter into the agreement, proposed that the estate should pay the rentals under the leasing agreement for any period during which the estate uses the equipment.

Should the bankruptcy decide not to become party to the estate a leasing the lessor shall be entitled to terminate the agreement, possession of the equipment and claim damages agreement, recover from the bankruptcy maximum amount corresponding to the estate at a actual loss calculated according to the "positive contractual interest". The proposed rules do not entitle the lessor to require the estate to provide special security beyond the security resulting from the claim against the bankruptcy itself. The for this that the estate reason lessor normally has already certain security because of the lessors a right of repossession of the equipment in a bankruptcy, and because rentals rule paid in advance for each period. In the event that are as a substantial default by the estate can be anticipated, the lessor may a terminate the agreement this ground and recover possession of the on equipment, unless the bankruptcy estate able to avert the termination by providing acceptable security without delay. In line with the regulation in the draft of the Council on exposure Legislation regarding the Corporate Restructuring Act, which expected be presented shortly, rule has been included in the to a Leasing Act, which limits the lessors right to terminate the leasing the bankruptcy of the lessee the ground of default by agreement on on the lessee prior to the bankruptcy. All of the rules the lessees bankruptcy are proposed to be on mandatory in favour of the bankruptcy estate.

Protection of the lessees rights as against third parties

The Leasing Act concludes with rules the protection of the lessees on rights in financial leasing of movable property. The regulation implies

that the lessees right under the leasing agreement the leasing right

protected in the established rights in rem, such as same way as ownership and lien. As result, the lessees possession of the a gives unconditional priority subsequent acquirers of equipment over ownership of lien the equipment. Even the lessee has not or on taken possession of the equipment, the leasing right superior to a rival claim under right in unless the possessor of the equipment a rem, has received in good faith with regard to the leasing right. further proposed that bona fide acquisition of leasing right should a a

be possible in accordance with the Act bona fide acquisition of

on personal property. As regards the lessees protection against the lessors creditors, the proposed rules are based on the same principles apply to the leases as of real property. The regulation implies that the lessee has no protection, unless has taken possession of the equipment. If the lessee has taken possession, has unconditional protection against all creditors, except the holder of lien, who according to the legal rules a on preference has a right superior to the leasing right. If the equipment encumbered with such lien, the leasing right be a may lost, where the equipment sold on distress or bankruptcy, sale a subject to the leasing right results in the pledgees receiving substantially less for his claim. However, the lessee its may preserve right in this case by compensating the pledgee for his loss resulting from the remaining in force of the leasing agreement. When applying these rules, the pledgee shall be entitled to take into account payments received under the leasing agreement, which refer the period to following the distress order or adjudication order in bankruptcy. A notice to a third party, who possession of the equipment consistently treated as being equal to transfer of possession. a

Consumer leasing

Considerations

Large parts of the terms of an ordinary agreement financial leasing on must be regarded as inequitable in a consumer relationship. The presentation and marketing of this type of agreement, which have been known so far, unacceptable in relationship. The are a consumer types of consumer leasing, which have been applied in recent years, have resulted in big problems and perceptible losses relatively to a large number of consumers. This particularly true of the leases car which were concluded in the from 1986 to 1990, when the years requirement for a minimum down payment in credit sale a was particularly high. There are no guarantees that similar problems will not arise again. The review of the advantages and disadvantages of consumer

leasing, which the Commission has performed, shows that the only circumstance which may be an advantage of consumer leasing from the individual consumers point of view that he may avoid or obtain lower down payment than in the case of a credit sale. However, this a cannot, of be advantage from the point of view of course, seen as an protection. shows instead that the primary function of consumer financial leasing to circumvent the mandatory rules of consumer protection contained in the Consumer Credit Act. The list of the disadvantages of financial consumer leasing could be made long. Particularly after the Consumer Credit Act was given a wider scope in 1992, to apply. in principle, to all other forms of consumer so as credit, the absence of the corresponding rules for financial leasing seems to constitute an inconsistent and unwarranted gap in consumer protection. Without comparison, the most and, to the consumer, the common financially most important form of consumer leasing refers to private From the consumers point of view, the agreements here are cars. virtually identical with credit sale. This only natural, since a financial leasing does not provide advantage worth mentioning for any the individual except the possibly short-term advantage of consumer, being able to circumvent the down payment.

Proposals

In the light of what has been said above, I recommend in the final report that the mandatory rules on credit sales contained in the Consumer Credit Act should be applied equally to financial consumer leasing, with certain deviations and clarifications regarding the special circumstances of leasing. Among the rules credit sales, which shall on be applied to leasing, the provisions on a minimum consumer are down payment, the right of consumers and creditors to require accelerated payment and the rules the creditors right of on repossession and the settlement to be made then. As regards the variation of the rental and the protection of the lessees real rights, I

recommend that the rules of the Leasing Act should apply to consumer

leasing as well. Special rules leasing proposed for the triangular on consumer are

relationship, which characteristic of this type of agreement. According to these rules, the lessee shall be entitled make claims to under the Consumer Sales Act against the supplier of the goods, as the supplier had transferred the goods directly to the lessee. As against the lessor, the lessee entitled to enforce its rights according to the rules of the Consumer Credit Act on triangular relationships. where the lessor shall be regarded creditor. The rules as a same are proposed to apply to both indirect and direct triangular leasing. shall further be obligatory in leasing, in consumer as consumer credit sales, in marketing and prior to the conclusion of agreements, to provide information the effective rate of interest, the of on cost credit and the cash price. Information shall also be provided about the lessee°s total financial commitment and the fact that part of the no rental may be deducted for tax All prices and shall purposes. amounts be stated, including value added tax. Finally, the lessee shall be entitled to terminate the leasing agreement at any time prior to expiry and to return the goods, although not before of the lease term has passed. Here, the one year rules of the Consumer Credit Act regarding settlement repossession on shall apply. The lessee must give months notice. one

Amendments to the Sale of Personal Property Act

In order to eliminate existing uncertainty regarding the possibility an to carry out sale and lease back transactions involving aircraft, which are valid from a real rights point of view, proposed to amend the Sale of Personal Property Act to mark clearly that this Act more covers such property as well. At the time certain simplifications same and enhancements of the sale of personal property proposed. Thus are there no longer a requirement for deed of sale to be signed by a witnesses, for the document to be presented to the head of the relevant enforcement district, for the special thirty days of for or grace a subsequent bankruptcy, distress floating charge. or

Tax and accounting issues

Background

Swedish tax legislation does not provide any specific rules on the leasing of movable property. The tax of a leasing consequences determined the basis of general tax rules and general agreement are on principles of tax law. There distinction between finance leases no and operating leases. As rule, leasing agreements are treated as a rental agreements, which means, among other things, that the lessor entitled depreciation allowances, while the lessee will be entitled to deduct the whole of the rentals the lessee an enterprise. to Agreements which have been denoted leasing agreements may sometimes constitute purchases. When determining the matter of transfer of ownership, the tax treatment usually also based on a consideration of the civil law relationship between the parties. There also links between tax law and the accounting are strong Today leasing agreements accounted for without treatment. are distinguishing between operating and finance leases. With few exceptions, the parties these agreements operating leases. This treat as for example that the lessor includes the asset in its balance means sheet and that the lessee does not account for its obligation to pay rentals as a liability. In June of this the Swedish Accounting Standards Council year, Redovisningsrådet adopted draft recommendation on the a accounting treatment of leasing agreements. The implication of the draft that leasing agreements should be accounted for in accordance with international practice, IAS 17 the International Accounting Standards Committces recommendation number 17, Accounting for Leases. lAS 17 based financial approach often defined as on a "Substance form". This that the accounting treatment of over means the transaction determined by the financial implication of the transaction rather than its legal form in civil law. IAS 17 classifies leasing agreements either operating leases or finance leases, which as of vital importance the accounting treament. Under a finance to lease substantially all the rewards and risks relating to ownership are transferred to the lessee. Thus the lessee accounts for the lease as an

asset, the obligation to pay future rentals shall be accounted for as a liability and the lessee who entitled to depreciate the asset.

Effects of financial leasing The Commission has analysed to what extent the actions of the parties are influenced by the intent of obtaining tax advantages or undue benefits under various rules in this area. has been said that the leasing of movable property does not generally produce any tax advantage, since the lessee rather than the lessor would have been entitled to depreciation allowances, the lessee had opted to buy the property. Such a line of reasoning presumes, however, that the enterprises concerned are in the same tax position. Yet, different companies incur different tax expenses on the acquisition of an asset. In one enterprise, the tax reduced by an allowance does not always equal the corresponding tax increase in the other enterprise. The value of depreciation for tax purposes not the same in each enterprise. This has had an impact, particularly on investor leasing. The tax advantages of leasing are often linked to the situation of the individual enterprise, but certain general tax advantages can be demonstrated. may be of advantage to the lessee not to be dependent on the size of the depreciation charges. Where short lease terms are involved, can deduct for costs more quickly by deducting rentals than by depreciation. Where movable property added to the lessees immovable property by leasing, the added property does not normally change its nature for tax purposes, but still constitutes equipment in the lessors accounts. This an advantage, the property of a kind which, had been bought by the lessee, would have been depreciated according to the rules for buildings or land improvements, for which the depreciation period considerably longer than for equipment. By deducting for rentals instead of depreciation, the lessee can achieve significantly faster cost deduction. The permissible depreciation of leased assets usually larger than the actual depreciation at the beginning of the lease term. Consequently the lessor can allocate the income from rentals and the depreciation charges over the lease term in an advantageous way.

In investor leasing, the investor obtains depreciation base and a depreciation charges reduce the taxable income. The fact that the depreciation charges initially, as a rule, are considerably larger than the rental income, enables the investor to set off a deficit in the leasing business against profit in another business. not unusual a for the investor to finance the acquisition by means of funds borrowed from the intermediary and even the interest on the loans of course deductible. If the leasing business carried on in a partnership, a certain allocation of income or loss can be made for tax purposes as

between the partners of the partnership investor company. By means

of contributions, the loss of the partnership can then be group transferred within a wholly owned group through an owner which limited thus achieving considerable tax advantages. The a company, tax effects have resulted in the establishment of leasing businesses purely for tax reasons. Since the tax reform, the volume of investor leasing has decreased considerably, since for example the lower corporate tax has reduced the value of depreciation and loss. However, investor leasing still very important when comes to property for which the cost of investment totals very large amounts and where the useful life of the asset may be 15 to 20 years or longer. The general possibility to depreciate even equipment acquired on 31 December by 30 per cent of the acquisition value, increases interest in dealing in depreciation bases immediately before the end of the which has happened for instance in investor leasing and fiscal year, sale and lease back. In sale and lease back transactions not unusual for accounting aspects to be of decisive importance. A large number of financial leases contain provisions on a guaranteed residual value, provisions to the effect that the lessee alone together with the lessor shall benefit from the positive difference or between the market value of the asset at the end of the lease term and the estimated residual value, provisions on the lessee°s right or duty to acquire the asset at certain price at the end of the lease term, etc. a In the implications of the terms of the leases render the some cases leases comparable purchase, although the parties normally seem to a that the leases will be taxed rent. seems to be to assume as reasonable that this development in the drafting of to assume agreements has been influenced by the fact that the parties perceive

as a tax advantage, an agreement which comparable to a purchase taxed as rent. A market has also developed for international leasing, cross-border leasing. This form of leasing, where at least party resident in one a country different from that of the others, an important and accepted form of cross-border investment. However, often seems that the structuring of leasing agreements has been significantly influenced by the possibilities to obtain tax advantages. The legislative differences of the countries involved then used in the formulation are of the agreements, for example by making possible to depreciate the same asset in several countries, a so called double dip, triple dip etc. According to the principal rule, there no right to deduction for VAT paid, when purchasing private The of this to a car. purpose levy VAT at a standard rate for the private of By contrast use a car. there full right to deduction for all the VAT paid for the costs of running the car. a car leased, a standard deduction of half of the VAT paid on the rentals permitted. The purpose of the rule on a standard rate in regard to leases to compensate in terms of VAT for the running and financing costs which may be included in the rental. From a VAT point of view, there should in principle be difference no between the purchase and leasing of a private car. However, there no difference between different forms of leasing regards the right as to deduction at a standard rate. A deduction be made for 50 may per cent of the VAT on rentals, even the lessee, under the agreement fully responsible for the running costs and consequently has the full right to deduct for the VAT paid on these costs. Thus there regular overcompensation for the running costs in connection with financial leasing.

Considerations

Generally speaking may be good thing that the market seen as a able to offer various forms of financing in order to satisfy the demand for equipment etc. The forms of agreement and alternative financing, which are being developed, should not, however, have their as principal or only purpose to avoid tax obtain tax credits. Financial or leasing may typically be seen to imply certain tax advantages. Leasing

businesses have been known to have been established purely for tax especially through investor leasing, before the tax reform, as reasons, well through other leasing by the establishment of limited as

partnerships kommanditbolag. Yet, cannot be maintained that the

various rules in this have been unduly exploited. The fact area rather that the existing rules on depreciation of equipment and a formal view of the distinction for tax purposes between a purchase and lease have been used far possible. Consequently the a as as Commission has particularly examined the steps that may be considered in this respect. Regardless whether tax advantages can be achieved not, these considerations should be seen against the or background of the uncertainty prevailing about the legal position in some respects. This true particularly for the distinction between a purchase and lease, but also in regard to the question whether a a requirement to deliver valid as a prerequisite for the acquirer°s right to depreciate equipment and the implications of such a requirement to deliver. Swedish Financial Accounting Standards The main purpose of the Council to develop the accounting standards, which apply to certain large, called public companies, for example by issuing so recommendations. As has been said before, the Financial Accounting Standards Council has adopted draft recommendation on the a accounting for leases, which corresponds in all material aspects to the international standard, IAS l7. However, the draft differs from IAS 17 much permitted for a group and an individual legal as as entity to apply different accounting principles. An application in full of the rules accounting for leases by a legal entity has been on regarded not being practically feasible in every case, since specific as rules taxation on the basis of such accounting either do not exist on or are incomplete. The Accounting Law Committee Ju 1991:07 was asked, among other things, to analyse whether there to reconsider the link reason which exists between accounting and taxation in Sweden. Having regard to the work thus being performed in various quarters, I will not make suggestions in the fields of accounting or taxation. any opinion, however, that an adjustment of the Swedish my accounting rules to IAS 17 should be aimed at. Certain tax law

measures should also be considered regarding the distinction between a purchase and a lease, the delivery requirement in respect of equipment and the use of the standard VAT rate for the leasing of private cars. I recommend that the civil law distinction between purchase and a a lease of equipment should for the time being form the basis of the distinction for tax purposes. Reasonable taxation however, presumes, that the financial implications of leases taken into account in the are tax treatment, since they may differ considerably from the formal assessment of the leases. The purpose behind the rules on depreciation recorded in the as books and their favourable nature also constitute good for reasons applying a financial approach to the question to which of the as one parties to a lease should enjoy the right to deductions for the depreciation of equipment. Such approach should be adopted, in an as much as leases, which have such strong features of the sale of goods and credit law that, in reality, they have the effect same as a purchase, should also be treated according to this effect for tax purposes. Leases containing terms, which, at the inception of the lease term, result in the lessors interest in the value of the equipment at the expiry of the lease term being insignificant that actual financial so no ownership interest remains, should be taxed purchases. When as assessing the allocation of the rewards and risks between the parties, such circumstances as the length of the lease term, the existence of options to buy or sell, the right or duty to the lease and the renew nature of the equipment and its estimated value must be accorded particular importance. However, the Commission does not have sufficient supporting material, for example from a socio-economic and legal policy point a of view to enable to form an opinion the appropriateness of on a general transition to a purely financial approach. Consequently, such rules are not recommended, even would be reasonable to do so strictly from a tax point of view. Nor can be determined at present whether such a transition should be implemented by means of special tax rules or by linking to a possible accounting Classification of financial leases. Yet, the appropriateness of a general transition should be considered, when the work relating to accounting issues, which

being carried on in various quarters, has been concluded. The Commission further recommends that a delivery requirement as prerequisite for the acquirers right to deduct for the depreciation of a equipment should be explicitly codified and that this requirement should, for the time being, be maintained also in the sale and lease back of equipment. A codified delivery requirement means that the buyer entitled to depreciate the equipment, provided that he regarded the owner of the assets for tax purposes and that they are as in the possession of the buyer or a third party for the buyers account that they have been delivered by the seller for transportation to the or buyer. the equipment already in the possession of a third party at the time of the lease, as for example in investor leasing, a notice terminating the right of disposal may replace physical delivery. As regards the rules relating to VAT law, recommended that the deduction at standard rate in respect of private cars and a motorcycles should be abolished, in so far as they refer to leases, under which rentals do not include running costs. With the present rules there regular overcompensation of running costs in connection with financial leasing. This form of hire consequently receives a more favourable tax treatment than a purchase. However, better to await the continued work on the VAT directives within the EU.

Credit law issues

Financial leasing constitutes financing business according to the Credit Market Companies Act 1992: 1610. Such business may, with certain specially stated exceptions, be conducted only by permission of the Financial Supervisory Authority Finansinspektionen. In recent years, leasing businesses have been established by Swedish partnerships handelsbolag and limited partnerships kommanditbolag for tax As far as may be seen from the Commissions material, these reasons. partnerships should have been under an obligation to obtain a permission, but have not done so. The Commission can only draw the Financial Supervisory Authoritys attention to that which has come to the knowledge of the Commission.

Regeringskansliets Offsetcentral 1994