PwC
Real Estate Leasing*
*connectedthinking
Content
1. Accounting
 Dan Marinescu, Senior Tax Consultant PricewaterhouseCoopers
2. Tax
 Richard Grotendorst, Tax Manager PricewaterhouseCoopers
3. VAT
 Diana Coroaba, VAT Manager, PricewaterhouseCoopers
Real Estate Leasing
PricewaterhouseCoopers
Slide 2
19 October 2005
PwC
Real Estate Leasing*
Accounting
Dan Marinescu – Senior Tax Consultant
*connectedthinking
Operating Lessor Accounting
Rental Income
Costs
 Recognise on straight-line basis  Costs, including depreciation,
over the lease term
incurred in earning the lease income
are recognised as expenses
 Unless some other systematic
basis is more representative of  Depreciation allocated on a
the time pattern in which the
systematic basis consistent with the
benefit derived from the leased
lessor's policy for similar assets
asset is diminished
 Initial direct costs (e.g. legal fees) on
an operating lease
Defer
Real Estate Leasing
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or
Recognise
Slide 4
19 October 2005
Operating Lessee Accounting
Rental expenses
Investment property under IAS 40
 Recognise on straight-line basis
over the lease term
 A real estate property interest held
under operating lease can be
classified as investment property
 Unless some other systematic
basis is more representative of
the time pattern of the lessee’s
benefit
 Property interest is accounted for
as finance lease
Costs
 The fair value model must be
adopted
 Costs for services, maintenance
and insurance are recognised
as expense when incurred
 Provided the Real Estate property
is held for capital appreciation or to
earn lease rentals
Real Estate Leasing
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Slide 5
19 October 2005
Finance Lessee
Accounting
Recognises the asset and the lease obligation on balance sheet
at the lower of the present value of the minimum lease
payments (MLP) and the fair value of the asset
Initial direct costs incurred
by the lessee in securing
the lease (e.g.
commission and legal
fees) are included as part
of the recognised asset
Real Estate Leasing
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Use interest rate implicit in
the lease if this is
practicable to determine; if
not, use lessee’s
incremental borrowing rate
Slide 6
19 October 2005
Finance Lessor
Accounting
Receivable
Fixed Asset
Gross
investment
in the lease
= MLPs from the
lessor’s point of view
+ unguaranteed
residual
Net
investment in
the lease
– unearned finance
income
Real Estate Leasing
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Slide 7
19 October 2005
Summary
Finance Lease - Lessee
Balance Sheet
Income Statement
Asset
Finance Charge
Lease Obligation
Depreciation Expense
Accumulated Depreciation
Reduction in Lease
Obligation
Finance Lease –Lessor
Operating Lease -Lessee
Receivable
Finance Income
Reduction in Receivable
Profit/Loss on Sale
N/A
Rental Expense
Operating Lease - Lessor Asset
Rental Income
Accumulated Depreciation Depreciation Expense
Real Estate Leasing
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Slide 8
19 October 2005
Leases involving land and buildings
Need to consider land and buildings individually
MLP allocated between Land &
Buildings (L&B)
Land  in principal operating lease
(unless title passes)
Buildings  decide whether finance
or operating lease
Under IAS 17
(Separate measurement is not required if land is immaterial or lessee’s interest in
L&B are classified as an investment property)
Real Estate Leasing
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Slide 9
19 October 2005
Complex issues
 Subleases
 Sale and leaseback
 Linked transactions
 Lease and leaseback
 Leases between related parties
 Sale and leaseback with special purpose entities
Real Estate Leasing
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Slide 10
19 October 2005
Sale and Leaseback
Sale of Real Estate by the vendor followed by
leasing of the same asset to the vendor
Finance Lease
Operating Lease
Sales proceeds
100
Carrying amount
(80)
Sale price = FV
Sale price < FV
Sale price > FV
20
 Recognise any
profit or loss
immediately
Recognise profit
or loss immediately
 Defer and
amortise excess
over period of asset
use
Defer and amortise
over lease term
Real Estate Leasing
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 If loss
compensated by
lower future lease
payments at below
market price defer
and amortise it in
proportion to the
lease payments
Slide 11
19 October 2005
Linked transactions
Lease and leaseback
Leases between related parties
 Lease accounting based on
the substance of risks and
rewards
 True economic substance of the
transaction prevails over the legal
form
 Up-front lease payment
followed by leaseback for
shorter periods with annual
rental payments
 Transactions frequently not
conducted at arms length terms
 criteria for an operating
leaseback may not be met
 Option to extend the lease
Finance arrangement
Real Estate Leasing
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Slide 12
19 October 2005
Sale and lease back with special purpose entities
 Involves the transfer and leaseback of an asset by the seller, to a
special purpose entity (lessor) wholly or partly funded by bank
borrowings or debt securities
 Accounting treatment of such transactions is complex
 Seller could de-recognise the asset unless control substantially all the
risks and rewards of the asset
Real Estate Leasing
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Slide 13
19 October 2005
PwC
Real Estate Leasing*
Taxation
Richard Grotendorst - Tax Manager
*connectedthinking
Definition under Fiscal Code
Finance lease Art. 7 (7) FC
A lease whereby at least one of the following conditions is met:
 The risks and benefits of the ownership of the leased property are
transferred to the lessee upon inception of the leasing contract.
 The leasing contract expressly provides for the transfer of ownership of
the goods subject to leasing to the user upon expiry of the contract.
 The leasing term covers at least 75% of the useful life of the leased
property (including any extensions of the lease term).
Operating lease Art. 7 (8) FC
Any leasing contract that does not fulfill the conditions to be classified as
a finance leasing.
Real Estate Leasing
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Slide 15
19 October 2005
Fiscal Aspects
Financial lease
 The asset is depreciated by the lessee.
 The interest expenses are deducted by the lessee.
 The building/land taxes are paid by the lessor.
 Insurance premiums are paid as agreed between the lessor and the
lessee.
 Fx gains (losses ) are taxable (deductible).
Operating lease
 The asset is depreciated by the lessor.
 The lessee deducts the lease instalments.
 The building/land taxes are paid by the lessor.
 Insurance premiums paid as agreed between the lessor and the lessee.
Real Estate Leasing
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Slide 16
19 October 2005
Interest deductibility
Two deductibility criteria:
1. Limitation of interest expense
 Loans from non-financial institutions (e.g. group companies)
 Limits: - NBR reference interest rate (RON)
- 7% (foreign currency)
 Non-deductible interest cannot be carried forward
2. Thin capitalisation rules (debt to equity 3:1)
 Interest and foreign exchange differences (debts > 1 year)
 Non-deductible interest can be carried forward
!
The criteria are not applicable to leasing companies (leasing
operations only) and to finance leases
Real Estate Leasing
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Slide 17
19 October 2005
Tax Depreciation (1)
 finance leasing - lessee is the owner
 Depreciation of the asset at the level of the lessee
 operating leasing - lessor is the owner of the leased asset
 Depreciation of the asset at the level of the lessor
 ! The general depreciation rules apply for leasing operations
Real Estate Leasing
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Slide 18
19 October 2005
Tax Depreciation (2)
 Difference between accounting and tax depreciation
 Based on useful lives stated in the Catalogue of Fixed Assets:
 Buildings (40 – 60 years), technical equipment (commonly 5 - 20 years),
office equipment (2 - 6 years)
 Land is not depreciable, but costs for land modernisation depreciable (10
years).
 Depreciation methods: straight-line (buildings), accelerated, reducing balance
 Complex assets (e.g. buildings) may be depreciated by subcomponents
 Valuation report by an independent appraiser recommended
 For assets acquired after having been partially utilised, useful life could be
determined by technical experts
 Revaluations are not recognised for fiscal purposes after 1 January 2004
Real Estate Leasing
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Slide 19
19 October 2005
Leases vs. Rental
 Rental contracts have similar profit tax treatment as operating leases
 Financing costs are fully tax deductible under leases as no thin
capitalisation rules apply and there are no other limitations
 Limitation of tax deductibility of financing costs for pure rental operations
financed by loans granted by other entities (either group companies or not)
or shareholder’s loans based
 No option right of tenant to purchase the real estate or minimum value of
rented property required as opposed to leases
 The rental period could be less than one year while the period of the lease
contracts exceeds one year
 No authorisation or computation method are required for rental agreements
Real Estate Leasing
PricewaterhouseCoopers
Slide 20
19 October 2005
Other tax issues
 Cross-border leasing – Non-resident owners of Romanian Real Estate
 Real Estate leased to residents and Permanent Establishment’s of
non-residents
 Real Estate leased to non-residents
 Potential WHT implications
 Local taxes – payable by the owner of the leased asset
 Land tax – fixed amount per sqm depending on the location
 Building tax - 0.5% to 1% of the building’s value or, if not revalued,
between 5-10%
Real Estate Leasing
PricewaterhouseCoopers
Slide 21
19 October 2005
Potential legislative amendments?
 Fiscal Code
 Specific provisions as regards Real Estate leasing (operating vs.
finance lease)
 Tax depreciation of Real Estate investments.
 Tax incentives (investment allowance, re-investment reserve).
 Law 332/2001 on direct investments with significant impact on
the economy
 Real Estate leasing to be included.
 GO 51/1997 on leasing operations
 Define sub-lease.
 Establishes a regulatory body on the leasing market.
Real Estate Leasing
PricewaterhouseCoopers
Slide 22
19 October 2005
PwC
Real Estate Leasing*
VAT
Diana Coroaba - VAT Manager
*connectedthinking
Leasing-Real Estate
Current treatment
EU Accession
 Subject to VAT
 Exempt with option to tax
 Option to tax the leasing
=> Mandatory taxation of any
subsequent transaction (?!)
Real Estate Leasing
PricewaterhouseCoopers
Slide 24
19 October 2005
Financial leasing
Current treatment
EU Accession
 VAT on principal
Option to tax
 VAT on installments
 Interest not subject to VAT
Real Estate Leasing
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(principal + interest)
Slide 25
19 October 2005
Adjustment period
Twenty years starting:

from 1 January of the year during which the right to deduct
arises, for the construction, purchase, transformation (20%)
or improvement (20%) of a building

from 1 January of the year during which the building was first
used
Real Estate Leasing
PricewaterhouseCoopers
Slide 26
19 October 2005
Adjustment method
 The adjustment is made once only for the whole period of
adjustment still to be covered
 The adjustment should be performed on an yearly basis in case
the destination of the building is changed from taxable to exempt
operations or vice-versa
Real Estate Leasing
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Slide 27
19 October 2005
Examples of one - off adjustment - 20 years -
Real Estate Leasing
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Slide 28
19 October 2005
Example 1
A leasing company purchases a building on 15 December 2007 for the
price of 7.140 RON incl. VAT (19% = 1.140 RON). It deducts 1.140 RON.
It uses the building for operations with a right to deduct.On 2 February
2009, the company concludes a leasing contract for the building. It does
not opt to tax the operation and therefore the leasing will be exempt
without a right to deduct.
Solution
 Year 1 (2007) is taken into consideration
 Year 2 (2008) is taken into consideration
 The loss of the right to deduct VAT appears in year 3 (not taken into
consideration)
Adjustment in favour of the State: 1.140 RON x 18/20th = 1026 RON to
be paid
Real Estate Leasing
PricewaterhouseCoopers
Slide 29
19 October 2005
Example 2
A leasing company purchases a building in 2007 for the price of 11.900
RON incl. VAT (19% = 1.900 RON). It knows it will use the building for
exempt operations (i.e. leasing) and does not deduct the input VAT. The
company concludes a leasing contract for the building for 5 years
starting with 2007 and does not opt for taxation.
In 2012, the leasing company concludes a new leasing contract with
another beneficiary for the next 15 years.
Real Estate Leasing
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Slide 30
19 October 2005
Example 2
Solution

In 2007 the company is not entitled to deduct the input VAT

In 2012 the company leases the building and opts to tax the leasing
=> The company must adjust the initial input VAT

The right to deduct VAT appears in year 5 (not taken into
consideration)
Adjustment in favour of the Company: 1.900 RON x 16/20th = 1.520 RON
Real Estate Leasing
PricewaterhouseCoopers
Slide 31
19 October 2005
Example 3
A leasing company purchases a building in 2007 for the price of 11.900
RON incl. VAT (19% = 1.900 RON). It knows it will use the building for
exempt operations (i.e. leasing) and does not deduct the input VAT. The
company concludes a leasing contract for the building for 8 years starting
with 2007 and does not opt for taxation.
In 2015, the leasing contract expires and the leasing company decides to
sell the building and tax the transaction. The sell price will be, due to
unfavourable market conditions, 5.950 RON incl. VAT (19% = 950).
Real Estate Leasing
PricewaterhouseCoopers
Slide 32
19 October 2005
Example 3
Solution
 In 2007 the company does not deduct the input VAT
 In 2015 the company sells the building and opts to tax the transaction
=> The company must adjust the initial input VAT
 The right to deduct VAT appears in year 9 (not taken into
consideration)
Adjustment in favour of the Company: 1.900 RON x 12/20th = 1.140 RON ,
however the deduction is limited to 5.000 x 19% = 950 RON ( the output VAT
charged on sale)
Real Estate Leasing
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Slide 33
19 October 2005
Compliance
Main requirements:
 The taxable person must keep a list of the capital goods subject
to VAT adjustment allowing the control of all tax deducted and
adjustments made
 This list must be kept during a period of five years after the end
of the adjustment
 Any other records, documents and books relative to capital goods
must be kept during the same period
Real Estate Leasing
PricewaterhouseCoopers
Slide 34
19 October 2005
In addition:
 More information will be included in the VAT return
 No longer – standard sales & purchase ledgers
 Quarterly recapitulative statements for intra-Community
deliveries and acquisitions
Real Estate Leasing
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Slide 35
19 October 2005
Possible case scenarios after Accession
Real Estate Leasing
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Slide 36
19 October 2005
ROMANIAN
LEASING
COMPANY
Leasing with
option to tax
Delivery of goods
ROMANIAN
CLIENT
2 operations:

Leasing – service: Taxable (option)
VAT on each installment (principal and interest)

No input VAT adjustment

Local supply of immovable goods at the end of the leasing contract (if
option exercised): Mandatory taxation (?!)
VAT on the sale price
Real Estate Leasing
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Slide 37
19 October 2005
ROMANIAN
LEASING
COMPANY
Leasing without
option to tax
ROMANIAN
CLIENT

Leasing – service: VAT exempt

Leasing company must adjust the input VAT initially deducted in
relation to the building, if any

One – off adjustment method
Real Estate Leasing
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Slide 38
19 October 2005
Leasing without
option to tax
FOREIGN
LEASING
COMPANY
ROMANIAN
CLIENT

Foreign leasing company pays Romanian
VAT on acquisition if the immovable property
is a new building

Leasing – service: VAT exempt

Foreign leasing company does not have to
register for VAT purposes in Romania
Acquisition of new
building
(VAT)
Romanian
supplier
Real Estate Leasing
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Slide 39
19 October 2005
Leasing with
option to tax
FOREIGN
LEASING
COMPANY

Acquisition of immovable
property
(Exempt with option to tax)

Romanian
supplier

Real Estate Leasing
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ROMANIAN
CLIENT
Foreign leasing company pays Romanian VAT
on acquisition if the immovable property is a
new building or if the supplier opts to tax the
transaction
Leasing – service:

Taxable

Romanian VAT on each installment
(principal and interest)
Foreign leasing company has to register for
VAT purposes in Romania and is entitled to
deduct the input VAT on acquisition
Slide 40
19 October 2005
PricewaterhouseCoopers services
 Training
 Pre-accession review (included tailored training)
 Pre-accession Forum
Real Estate Leasing
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Slide 41
19 October 2005
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© 2005 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network
Real
Estate Leasing
of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and
independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers.
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Slide 42
19 October 2005