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Introduction |
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. |
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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. |
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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. |
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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. |
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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%. |
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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. |
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Editors Note: It is our policy not to mention our clients by name in
The Romanian Digest™ or discuss their business unless it is a matter of
public record and our clients approve. The information herein is correct
to the best of our knowledge and belief at press time. Specific advice
should be sought from us, however, before investment or other decisions
are made.
Copyright 2006 Rubin Meyer Doru & Trandafir, societate civila de avocati.
All rights reserved. No part of The Romanian Digest™ may be reproduced,
reused or redistributed in any form without prior written permission
from the publisher.
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