TABLE OF CONTENTS. Foreword. Chapter 1: Introduction. Chapter 2: Transaction/lease characterization aspects

Transcription

1 TABLE OF CONTENTS Foreword Chapter 1: Introduction Chapter 2: Transaction/lease characterization aspects v Introduction Lease characterization in the United States True lease: prerequisite for obtaining the tax advantage The IRS view Revenue Ruling : IRS view on what constitutes a true lease Revenue Procedure 75-21: Detailed Guidelines for granting advance rulings Revenue Procedure Judicial developments Case law developments vis-à-vis the Guidelines requirements: a comparison Court decisions on transaction characterization: lease v. sale Lease characterization in the United Kingdom Definition of finance lease Relevance of Generally Accepted Accounting Principles Definition of finance lease under SSAP Court decision on characterization of lease transaction Lease characterization in Germany Significance of economic ownership Definition of economic ownership German Supreme Fiscal Court decision on transfer of economic ownership Tax circulars on attribution of economic ownership Lease characterization in the Netherlands Significance of economic ownership Hoge Raad decision on economic ownership Lease arrangement Lease characterization in Japan 23 vii

2 Lease v. sale Finance lease 25 Chapter 3: Depreciation/capital allowances aspects Introduction General scheme of depreciation allowance United States Generally applicable method of depreciation Applicable recovery period Applicable convention United Kingdom General Capital allowances for cars Germany Netherlands Japan Eligibility for depreciation allowance (ownership criterion) United States United Kingdom Germany Economic ownership Circulars issued by the Federal Ministry of Finance Full pay-out v. non-full pay-out leasing Attribution of the economic ownership in the case of full pay-out leasing Attribution of the economic ownership in the case of non-full pay-out leasing Netherlands Japan Accelerated depreciation/capital allowances United States United Kingdom First-year allowances Capital allowances for ships Rollover relief in respect of disposal of ships Germany Netherlands Japan 44 viii

3 3.5. Restrictions on depreciation/capital allowances in case of leasing United States Alternative Depreciation System (ADS) Exceptions Qualified technological equipment (QTE) Other exceptions United Kingdom Denial of the first-year allowance Restriction in the case of a purchase option Restriction on capital allowances in the year of acquisition Restrictions in the case of overseas/export leasing Restriction in respect of free depreciation on the ships used for overseas leasing Restrictions in the case of sale and finance leaseback arrangements Restrictions in the case of sale and finance leaseback on defeased terms Germany and the Netherlands Japan 53 Chapter 4: Income recognition aspects Introduction Relevant income recognition rules in the USA (IRC Sec. 467 and Final Sec. 467 Regulations) Applicability of IRC Sec Consequences of applicability of Sec. 467: income taxation on an accrual basis Rent accruals under Sec Rent accrual in the case of agreements not perceived as tax avoidance transactions Relevant provision in IRC Sec. 461(b)(1) Rent computation formulae prescribed under the Regulations Rent accrual in the case of perceived tax avoidance transactions Tax treatment of rents under the perceived tax avoidance transactions 59 ix

4 Meaning of the perceived tax avoidance transactions Sec. 467 interest Safe-harbour provisions Relevant income recognition rules in the United Kingdom Taxation of operating lease rental income Taxation of finance lease rental income Background Return of investment in capital form Negative depreciation Relevant income recognition rules in Germany Relevant income recognition rules in the Netherlands Relevant income recognition rules in Japan 66 Chapter 5: Limits of tax-driven cross-border leasing transactions Introduction Relevant anti-avoidance rules in select jurisdictions: a brief overview United States The sham transaction doctrine The step transaction doctrine The business purpose Doctrine The substance-over-form doctrine The economic substance or the economic sham transaction doctrine The US Supreme Court decision in the Frank Lyon case Application of two-fold test by the lower courts in the United States United Kingdom The Ramsay principle (W.T. Ramsay v. IRC) The step-transaction doctrine (Furniss v. Dawson and Craven v. White) Trading transactions v. transactions with the sole objective of obtaining tax advantage (Overseas Containers (Finance) Ltd. v. Stoker (Inspector) and Lupton v. F.A. & A.B. Ltd.) 78 x

5 The limits of the Ramsay principle (MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd) Germany and the Netherlands Legal system: impact on tax-driven cross-border leasing transactions Tax-driven leasing transaction structures Sale and leaseback Nature of the transaction The US: Court of Appeals decision in Sun Oil Co. v. Commissioner of Internal Revenue United Kingdom Restrictive provision under the Capital Allowances Act UK Court of Appeals decision in BMBF case Netherlands: technolease cases Chain-lease structure Nature of the transaction BMBF (No 24) v. Inland Revenue Commissioners Relevant facts Relevant statutory provisions Relevant issues before the High Court Decision by the High Court on applicability of Sec. 42(3) to headlease or sublease Critical remarks on the High Court decision Double-dip leasing Nature of transaction Typical double-dip lease structure How does double-dip leasing provide a tax advantage? Can double-dip lease, per se, be regarded as abusive? Two-tier double-dip structures Nature of transaction Use of two-tier double-dip structures in Japan Can two-tier double-dip leasing, per se, be regarded as abusive? Leveraged leasing Nature of transaction 102 xi

6 Comparative analysis of anti-deferral provisions (to counter rear-loaded leases) under the US and the UK tax laws Use of non-recourse debt funding in leveraged leases: position in the United States and the United Kingdom United States: at risk provisions of Sec. 465 of the IRC United Kingdom: House of Lords decision in Ensign Tankers case United Kingdom: implications of Ensign Tankers decision on leveraged leases involving non-recourse debt financing German leveraged leases Modified German leveraged leases (modified subsequent to Sec. 2b introduction) Japanese leveraged leases Replacement leases Like-kind exchange structure Lease-in-lease-out (LILO) Tax sparing credit (TSC) structures Japanese safe-harbour structures (agreement between Japanese tax authorities and Japan Leasing Association) Tokumei Kumiai arrangements Japanese operating leasing Defeasance structures Nature of transaction United Kingdom Court of Appeals decision in Barclays Mercantile Business Finance Ltd. v. Mawson (Inspector of Taxes) Relevant facts Position taken by the tax authorities Decision by Special Commissioners High Court decision Court of Appeals decision 131 xii

7 Chapter 6: Tax treaty implications of lease income characterization Introduction Tax treaty definition of royalties vis-à-vis lease rentals for ICS equipment The OECD position Definition of royalties in tax treaties The characterization issue: effect on treaty distributive rules Complexity of the issue Characterization: from which state s perspective? Characterization of the finance lease income Finance lease rentals vis-à-vis royalties in treaty context Finance lease rentals and interest in treaty context The characterization issue OECD position Definition of interest in tax treaties Scope of definition of interest (version a): income from debt claims (similar to OECD definition) Scope of definition of interest (version b): income assimilated to income from money lent Position in the United States Position in the United Kingdom Position in Germany and the Netherlands Characterization of operating lease income 147 Chapter 7: Tax treaty aspects of taxation of cross-border leasing income in the source state Introduction Differing provisions in bilateral tax treaties Differing provisions concerning royalties Right to tax royalty income and treaty definition of royalties Withholding tax: rate differences Beneficial ownership requirement 150 xiii

8 Differing provisions concerning interest income Taxing right and rate differences Beneficial ownership requirement Differing provisions concerning taxation of capital gains Implications of differing provisions in bilateral tax treaties Entitlement to treaty benefits in case of improper use of tax treaties (by third-country residents) Relevance of the issue in cross-border leasing transactions Entitlement in case of improper use of tax treaties: contemporary position The OECD view The 1977 and 1992 OECD MC Commentaries The OECD Conduit Companies Report The 2003 version of the OECD MC Commentary Views expressed by commentators Court decisions on treaty entitlement of interposed entities Court decisions in the United States Court decisions in the Netherlands Court decisions in Germany Conclusion Anti-abuse tax treaty provisions relevant for cross-border leasing transactions Beneficial ownership The beneficial owner requirement Purpose of the beneficial owner requirement Definition of the term beneficial owner OECD Commentary on the term beneficial owner International tax language meaning of beneficial owner Beneficial ownership of income rather than the income-producing asset Implications of absence of beneficial ownership requirement in a tax treaty The two sublease case studies vis-à-vis the beneficial ownership requirement Limitation on benefits article 172 xiv

9 Chapter 8: Relevance of the EC Treaty (cross-border leasing between the EC Member States) Scope of the chapter UK capital allowance restrictions in the case of outbound leases The restrictive provision Conflict with a Treaty freedom Potential justifications for the restrictive national tax law provision Need to prevent loss of revenue Fiscal cohesion Fiscal cohesion argument: seldom accepted by the ECJ Bachman and Commission v. Belgium The two prerequisites for acceptance of the fiscal cohesion argument The UK restriction of capital allowance on outbound leases: the two conditions for the fiscal cohesion argument not satisfied The abuse argument Argument not yet accepted by the ECJ in tax cases Can the Treaty be relied upon to shield abusive transactions? The abuse argument vis-à-vis the UK restriction of capital allowances in the case of outbound leases Fiscal supervision Territoriality argument Main conclusion on the issue Denial of group relief in respect of losses suffered by subsidiaries resident in other Member States The issue The Marks & Spencer case Conflict with a Treaty freedom (freedom of establishment) Potential justifications for the restrictive national tax law provision The argument relating to the need to prevent loss of revenue The fiscal cohesion argument The abuse argument 203 xv

10 Fiscal supervision argument Territoriality argument Main conclusion on the issue Final conclusions 206 Chapter 9: Summary, conclusions and recommendations Background Summary and conclusions Income recognition aspects The tax deferral advantage of rear-loaded lease rentals Relevant anti-avoidance provisions in select jurisdictions Effectiveness of anti-avoidance provisions in the United States vis-à-vis the United Kingdom Depreciation aspects Significance of depreciation allowance in tax-driven leasing transactions General scheme of depreciation allowances in the select jurisdictions Eligibility criteria for depreciation allowance (legal v. economic ownership) Incentives and restrictions Transaction characterization aspects Significance of transaction characterization Transaction characterization in select jurisdictions Legal systems, anti-avoidance principles and aggressively tax-driven transaction structures Tendencies of taxpayers towards aggressively tax-driven transactions Scope of general anti-avoidance rules Impact of legal systems on tax-driven cross-border leasing transactions Tax-driven transaction structures Sale and leaseback transactions Chain-lease transaction structure Double-dip leasing Two-tier double-dip leasing Leveraged leasing 220 xvi

11 Leveraged leases with uneven rents Leveraged leases involving non-recourse financing German leveraged and modified leveraged leases Defeasance structures Tax treaty implications of transaction characterization Tax treaty definition of royalties Tax treaty characterization in the case of operating lease Tax treaty characterization in the case of finance lease The issue of tax treaty characterization as royalties The issue of tax treaty characterization as interest Differing provisions in tax treaties and improper use of tax treaties Differing provisions in tax treaties Improper use of tax treaties and entitlement to treaty application Implications of absence of beneficial ownership requirement in tax treaties Effect of typical Limitation on benefits article on leasing entities Relevance of EC Treaty in the context of cross-border leasing EC freedom to provide services: leasing constitutes a service Overseas leasing: capital allowance restrictions Compatibility of group relief regimes with the EC Treaty Recommendations Amendments to UK tax law for taxation of finance lease rentals on an accrual basis UK safe-harbour rules for leasing transactions Amendments to the Capital Allowances Act 2001 (UK) in respect of cross-border leases with lessees resident in the other EC Member States 229 xvii

12 Amendments to group relief regimes under the tax laws of the United Kingdom, Germany and the Netherlands Strengthening specific anti-avoidance regime under the UK tax law United Kingdom: specific restrictive provision concerning interest on non-recourse finance Inclusion of clarifications in tax treaties: aspects relating to characterization of finance lease income 232 Appendices 235 Appendix 1 US case law on lease v. conditional sale 235 Appendix 2 Special and accelerated depreciation in Japan 249 Appendix 3 List of treaties examined 253 Appendix 4 ECJ cases examined for ascertaining arguments advanced by the Member States to justify restrictive provisions under the national direct tax laws 255 Bibliography Table of case law xviii