Purchase or lease of fixed assets - Fiscal implications

This page was last modified on 04-08-2017

A company needs to equip its facilities; it therefore needs to invest in fixed assets, i.e. assets (property, equipment, fixtures and fittings, etc.) which it will keep on a long-term basis. These assets are related to both the business premises and the equipment required for business operation.

Businesses making these investments need to look into the financial solutions available to them. Depending on the amount of initial funds available and its financing options, a business can decide to purchase or lease the resources it needs.

The decision to purchase or lease will have immediate and long-term tax implications.

Who is concerned

All Natural and legal persons can decide to purchase or lease the fixed assets (property, machinery, equipment, etc.) which are necessary for their activity.

How to proceed

Purchase of fixed assets: entering a sales contract

When the company acquires a fixed asset, it appears on its commercial and tax balance sheet, which is used to inform third parties with regard to the breakdown of the business's working capital.

In the event of making a purchase, a company can book depreciation expenses which are then deducted from its taxable income. Maintenance costs are also deductible, as is interest on loans taken out in order to finance these fixed assets.

The purchase has immediate tax implications:

  • in the event of purchasing a building, the company must pay a registration fee;
  • in the event of purchasing a transferable asset (a car, equipment, etc.) the company must pay VAT but it is frequently immediately and fully refundable on application to the Indirect Tax Authority. It should be noted that in certain cases, the sale may be VAT-exempt.

NB: Luxembourg taxpayers making an intra-EU acquisition of goods must declare it as such in the relevant section of the VAT declaration: it is taxable at the rate of 17 %. In exchange, the input tax levied on this transaction is fully deductible.

Example: purchase of a new car in Germany and subsequent registration in Luxembourg.

Germany

  • price: EUR 25,000 excl. VAT (the sale is VAT exempt)
Luxembourg
  • declaration of the purchase as an "intra-Community purchase of goods";
  • output VAT due: 25,000 x 17 % = EUR 4,250;
  • declaration of the purchase as a "receipt of goods or investment goods";
  • deductible input tax: 25,000 x 17 % = EUR 4,250.

Leasing of fixed assets: entering a leasing contract

Definition

A lease is a contractual credit technique by means of which a leasing company (the lessor or licensor) purchases, on request by and in accordance with the specifications of its client (the lessee or licensee), the ownership of movable or immovable assets, in order to lease them for a fixed term in exchange for fees or lease payments.

The rental payment consists of a fraction of the capital invested by the leasing company, the interest outstanding on this capital and the leasing company's profit margin.

Advantages and disadvantages

Leasing has the advantage of flexibility and frees the business from having to raise large sums at the start of its activity, at a time when income is not yet significant.

Financing an asset through leasing offers the following benefits:

  • it enables payment of VAT to be spread over the full lease term, with the VAT being pre-financed by the leasing company;
  • when used to finance the purchase of immovable assets, it enables the lessee to defer payment of registration fees;
  • it enables the lessee to designate a third party to purchase the asset at the end of the contract;
  • it is an alternative means of financing carried out without restriction on the basis of the total amount of the investment, often without the need for the lessee to provide additional collateral and without using their own funds;
  • repayments can be tailored to forecast cash flows;
  • the company's balance sheet and operating account will be calculated based on the purchase option selected. Certain ratios (solvency, debt, return on assets) can work to the business' advantage.

It is, however, more expensive in absolute terms than purchasing.

Tax impact

Tax law makes a distinction based on whether or not the asset appears on the company's balance sheet.

In principle, the asset in question is allocated to whoever is its legal owner.
However, when use of the asset is by a third-party, tax law assigns the financial ownership of the asset to that party. The lessee may in that case benefit from tax deductions:

  • if the lessee is the tax owner of the asset, the asset is shown in the assets on the lessee's balance sheet, not that of the legal owner. It is also the lessee which depreciates the asset.
    In these circumstances, lease payments will be broken down into 2 parts:
    • one part is made up of the interest, which is deductible from the user's tax base;
    • and the other part is made up of debt repayments, which is non-deductible;
  • if the lessee is not the tax owner of the asset, the lease payments will be fully deductible from its tax base.

Different forms of leasing exist depending on the type of assets required by the company, its financial position and the level of commitment it wishes to make: this may involve a capital lease, an operating lease or a property lease.

Comparative table: purchase - leasing

Purchase

Leasing

Need for financing

No financing

Immediate registration fee (property) or VAT on the purchase cost (car, equipment, etc.)

Registration fee deferred over time (property) or VAT on lease payments (car, equipment, etc.)

Tax deduction:

  • of the depreciation;
  • of the loan interest;
  • of the maintenance costs
  • if capital leasing: depreciation and loan interest are tax deductible
  • if not, the rental payment is deducted

Entitlement to tax relief for investment

Entitlement to tax relief for investment only in the case of capital leasing

The fixed asset will appear on the commercial balance sheet of the business

The fixed asset will not appear in the commercial balance sheet of the business; only the lease payments shall be entered in the income statement

Who to contact

Luxembourg Inland Revenue (ACD)
45, boulevard Roosevelt
L-2982 - Luxembourg
Luxembourg
Phone: (+352) 40 800-1
Fax: (+352) 40 800-2022

Indirect Tax Authority
1-3, avenue Guillaume
L-1651 - Luxembourg
Postal box B.P. 31, L-2010 Luxembourg
Luxembourg
Phone: (+352) 247-80800
Fax: (+352) 247-90400
Email info@aed.public.lu