Use of financial leasing for renovation of fixed capital of enterprises

In connection with the 25th chapter of the Tax Code implemented in January 2002 enterprises will acquire fixed capital from their net profit. It makes the use of leasing as a financial tool more attractive.

Leasing is a universal financial tool, which allows to essentially optimize the taxation of industrial enterprises during renovation of their fixed capital.

Inclusion of leasing payments in production costs makes leasing one of optimum mechanisms of regulating taxable profits of an enterprise.

Key features of leasing activities in the Russian Federation:

• legal framework of leasing operations on the territory of the Russian Federation consists of Civil Code (Chapter 39), Federal Law "On leasing" #164-FZ dated 29/10/1998 and UNIDRUA Convention on International Financial Leasing;
• the property transferred to financial lease may be either on lessor's or on lessee's balance;
• the ownership right for the leased property passes from the lessor to the lessee after redemption of all leasing payments and on expiration of the leasing period.

Main advantages of using leasing are as follows:

• leasing payments are wholly included in production costs of an enterprise that allows to reduce the taxable base of the profit tax;
• leasing company has the right to charge depreciation of the leased equipment with the factor of up to 3;
• minimization of property tax payments (payments of the property tax decrease by 3 times if accelerated depreciation of the leased fixed assets is used);
• possibilities of tax planning are combined with possibilities of raising additional funds by the leasing company;
• flexible conditions of a leasing agreement, in particular, the use of various alternatives of leasing payments (constant, with a constant rate of change, under an agreed schedule, etc.).

In comparison with direct credit the effectiveness of leasing operations is estimated by the volume of total expenditures of an enterprise (including tax payments) connected with the equipment acquisition, depreciation and bank credit repayment.

The effectiveness of leasing comes from:

• all leasing payments including credit principal debt, credit interest, margin and taxes of a leasing company are included in production costs of an enterprise, i.e. the enterprise's profit tax is reduced by the amount of leasing payments without VAT;
• the property tax payment is reduced by 3 times because of using by the leasing company accelerated depreciation;
• an enterprise has an opportunity to reimburse greater VAT sums than in case of direct purchase.