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Passive Accruals and Deferrals for Earnings from Cross-Border Leasing and Leasing Back of Capital Assets

Senate of Finance Berlin, Tax Guidelines from April 22, 1999, III A 13 - S 2170 - 2/97

There have been cases where a taxpayer residing in Germany has granted a long-term
lease for a fixed asset owned and financed by said taxpayer to an investor residing in the U.S. to immediately lease the fixed asset back from the investor for a shorter lease term. In addition, the taxpayer was granted the option to buy back the lease contract rights of the U.S. investor after the lease back contract expired with the result of being able to conclude the entire transaction at this point in time.

The remuneration for the rental by the U.S investor, the remuneration for the lease back by the taxpayer and the option remuneration of the respective obligator are (at the present value) paid at once. As a result, the taxpayer receives a so-called present value benefit from the transaction, which is especially caused by the utilization of U.S. tax rules by the U.S investor.

The rights and duties resulting from the lease and back lease contracts basically mirror one another. The contract parties assume that the transaction does not change the legal ownership of the assets and that the U.S. investor does not become the economic owner of the assets either.

The result of a discussion on the level of the federal government and the states, these sets of agreements are not to be viewed as lease and lease back contracts but rather as one sui generis contract. According to the set of agreements, the contract partner from the Germany receives the so-called present value benefit (at the same time as well) at the time when all contracts are settled simultaneously.

This present value benefit is to be viewed as an immediately taxable income and cannot be collected over time, spread out across the time span of the "back lease contract" within the framework of an accruals and deferrals item. The obligation to pay future indemnity in certain cases, if applicable, also does not represent a (partial) repayment of the collected so-called present value benefit and cannot be a reason to post any collected remuneration in an accruals and deferrals item.