A boost to tax write-offs by Finland’s government means leasing finance is holding up well in the country despite an adverse side to the tax changes
The Finnish government has announced a temporary boost to tax write-offs on plant and machinery during the current economic downturn.
Lessors are prevented from claiming the increased allowances. Under certain alternative financing arrangements, however, lessees can claim the enhanced allowances where they have sufficient taxable income to make use of them.
The normal rate for fiscal depreciation on plant in Finland is 25 percent on the “declining balance” basis. The rate is now effectively doubled for a two-year period.
“For capital expenditure incurred at any time between 1 January 2009 and 31 December 2010, the taxpayer can write off 50 percent of the cost in Year 1 and a further 25 percent (that is, 50 percent of the tax-depreciated value) in Year 2,” said Timo Torkkel, KPMG’s tax partner for Finland.
Torkkel explained: “There are two possible ways for equipment users to benefit from these 50 percent annual write-offs while at the same time making use of asset finance.
“One is hire purchase, where the lessee is treated as the owner of the asset from the start although he will not actually take legal ownership until the end of the contract. The other is ‘lease and lease-back’.”
Under a Finnish lease and lease-back, the equipment user owns the asset at all times. He leases it to the finance company, which pays for its financial use of the asset mainly through a single advance rental. The asset is then leased back to the user on a conventional profile of periodic rentals.
“Leasing finance is holding up very well in Finland, in spite of the adverse aspect of the new tax moves,” said Torkkel.
The normal 25 percent write-off rate for plant in Finland is exactly the same as the old UK rate for most equipment before it was cut to 20 percent last year.
The temporary enhancement during the recession is distinctly more generous than the UK system of 40 percent first-year allowance.
The normal system of lease taxation in Finland allows the lessor to claim fiscal depreciation on all leases where there is no provision for title to pass to the lessee – much as the UK system was before the advent of the “long funding lease” rules in 2006.
The ban on lessors claiming the temporarily enhanced allowances is unusual in continental Europe. However, this type of discrimination against leasing has been seen repeatedly in the UK over the past 12 years.