Revenue Note for Guidance

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Revenue Note for Guidance

299 Allowances to lessees

Summary

The general tax treatment for leasing transactions (being a that of a rental transaction in line with its legal form) may not be appropriate in scenarios where the lease bears the economic hallmarks of a financing transaction. One key hallmark of such transactions is where the lease is let on such terms that the lessee is bound to maintain the asset and deliver it in good condition to the lessee and that that burden of wear and tear actually falls on the lessee and not the lessor.

Where a lease transaction bears such hallmarks, this section provides that the transaction may be taxed in accordance with its economic form, subject to certain anti-avoidance criteria being met. In most cases (except for operating lessors and FRS 102 operating lessees affected by this section), this will broadly align the computation of leasing rental profits or expenses for tax purposes with the computational rules under accounting standards.

Prior to Finance (No.2) Act 2023, this section only addressed the computational rules and treatment of capital allowances for trading finance lessees in scenarios where the lessee bore the burden of wear and tear by reason of the terms of the lease.

Details

(1) The section applies where:

  • the machinery or plant is let under a relevant lease (within the meaning of subsection (1A)),

the terms of the lease provide that the lessee is bound to maintain the machinery or plant and deliver it over in good condition at the end of the lease term and that burden of wear and tear actually falls directly on the lessee.

Where the section applies:

  • the capital expenditure in respect of the leased asset shall be deemed to have been incurred by the lessee for the purposes of sections 283 and 284, and
  • the leased asset shall be deemed to belong to the lessee and not any other person.

(1A) For the purposes of this section, a relevant lease is either:

  • a finance lease, or
  • an operating lease where:
    • the present value of the minimum lease payments (This should be calculated using the interest rate implicit in the lease. Where a lessee does not know the implicit rate, they may use their incremental borrowing rate instead – this option is available to lessees only) is greater than or equal to 80% of the fair value of the asset
    • the term of the lease is more than 65 per cent of the remaining useful economic life of the asset, and
    • the asset is subject to a purchase option that is likely to be exercised.

(2) A lessee carrying on a trade is not entitled to accelerated wear and tear allowances (free depreciation) in respect of machinery or plant unless the contract of letting provides that the lessee will or may become the owner of the machinery or plant at the end of the letting period. If free depreciation is claimed but the lessee does not become the owner of the machinery or plant, the allowances are withdrawn to the extent that they exceed the normal wear and tear allowances, and any necessary amended assessments or adjustments of assessments are to be made to recover that excess. However, there will be no withdrawal of the allowances where the lessee dies before being able to become the owner of the machinery or plant.

(3)(a) In this section, ‘fair value’ in relation to a leased asset, refers to the amount that would be expected to be payable for the asset at the outset of the lease at an arm’s length basis, less any grants receivable by the lessor towards the purchase of the asset.

(3)(b) Where the lessee is an individual, this section will only apply where the lessee and lessor make a joint election to apply the section. Where the lessor is not within the charge to tax under Schedule D, the lessee may solely elect that the provisions should apply. The election must be made in writing on a form approved by the Revenue Commissioners.

Computation of lease payments - lessees

(3)(c)(i) Where this section applies to a lessee, the amount to be deducted for any chargeable period in respect of the relevant lease payments, is to be the amount of the lease payments which have been deducted in the profit and loss account for the period in accordance with generally accepted accounting practice.

The aggregate amount (referred to in subparagraph (ii) as “the aggregate deductible amount”) of lease payments to be deducted in the tax computation over the lease term (defined in section 76D) should be the aggregate amount of such payments which in accordance with generally accepted accounting practice would be deducted from the profit and loss account over the terms of the lease.

(3)(c)(ii) The amount of expenditure on which wear and tear allowance will be granted will be the difference between the aggregate amount of “lease payments” made to the lessor over the terms of the lease and “the aggregate deductible amount” as defined in subparagraph (i).

Computation of lease payments - lessors

(4) Where this section applies to a corporate lessor, the taxable profits should be calculated using the computational rules for financing lessors per generally accepted accounting practice (defined in section (4)), regardless of how the lease is recorded in the accounts.

Anti-avoidance

(5) A corporate lessor may only (subject to subsection (5A)) calculate their profits in accordance with this section in respect of a relevant lease where all of the following apply:

  • The leased asset actually belongs to the lessor (both immediately prior to the lease transaction and throughout the lease term),
  • The asset is leased on such terms that the burden of wear and tear falls on the lessee and the lease is a relevant lease,
  • The asset was acquired by the lessor either
    • on arm’s length terms, or
    • by way of a section 312(5) transfer, subject to that asset having originally been acquired by the transferor at arm’s length
  • The asset was not subject to replacement asset relief,
  • The asset is leased on arm’s length terms,
  • and
  • The required disclosures have been made:
    • Where the lessee is an individual, a joint election is required, and the lessor is also required to provide information outlined in subsection (9) in their corporation tax return.
    • Where the lessee is not an individual, the lessor is required to make a claim in the return to be taxed on their accounting profits. The lessor and lessee (where the lessee is resident in the State) must also jointly agree at the outset of the lease where the burden of wear and tear lies.

Anti-double dipping rules

(5A)(a) and (c) Where a lease is between associated enterprises, the lessor cannot avail of the section 299(4) computational rules where at the date of commencement of the lease:

  • the lessee, in computing their liability to foreign tax, is entitled to both a relief similar to capital allowances (e.g. tax depreciation), and any other deduction, allowance or relief in respect of the lease payments, and
  • the total relief available materially exceeds the aggregate lease payments over the lease term.

Where the lessee sublets the asset, the sub-lease must also not generate reliefs in excess of the aggregate lease payments over the lease term.

Where the terms of the lease are changed during the lease term, section 299(4) computational rules cease to apply where the change in terms has given rise to reliefs in excess of the aggregate lease payments.

A lessor cannot avail of the computational rules in section 299(4) where—

  • the lease has not been entered into for bona fide commercial reasons, and
  • the lease is part of an arrangement—
    • into which a tax advantage has been priced in, or
    • which is structured to give rise to a tax advantage.

Date of commencement of the lease

(5B) The date of entering into the lease can be read as the date of commencement of the lease, subject to such difference not giving rise to a tax advantage.

Reporting requirements

(7) Where a corporate lessor is making a claim for a relevant lease to be taxed in accordance with this section, and the lessee is not an individual, the lessor shall be required to provide the following in respect of the relevant lease:

  • the name of the lessee, and the lessee’s—
    • tax reference number where they are resident in the State,
    • jurisdiction of residence where they are resident in a DTA jurisdiction,
    • territory of residence where they are resident in a territory other than a DTA jurisdiction,
    but where the lessee is not regarded as resident in any of the above jurisdictions or territories, the lessor shall instead provide the name of the territory under whose laws the lessee was created,
  • whether the lessee is an associated enterprise of the lessor, for the purposes of Chapter 4 of Part 35C (defined in section 835AA),
  • the open-market price (within the meaning of section 289(1)) of the leased asset,
  • the discounted present value of the lease payments under the lease and the discount rate used, and
  • the amount of the capital allowances foregone by the lessor as a result of the claim.

(8) Where this section applies to a corporate lessee they shall be required to provide the following in respect of that relevant lease:

  • the name of the lessor, and where the lessor’s—
    • tax reference number where they are resident in the State,
    • jurisdiction of residence where they are resident in a DTA jurisdiction,
    • territory of residence where they are resident in a territory other than a DTA jurisdiction,
    but where the lessor is not regarded as resident in any of the above jurisdictions or territories, the lessee shall instead provide the name of the territory under whose laws the lessor was created,
  • whether the lessor is an associated enterprise of the lessor, for the purposes of Chapter 4 of Part 35C (defined in section 835AA),
  • the open-market price (within the meaning of section 289(1)) of the leased asset,
  • the discounted present value of the lease payments under the lease and the discount rate used,
  • the amount to be deducted in computing the profits or gains to be charged to tax
  • the amount of capital expenditure deemed to have been incurred by the lessee as a result of the claim, and
  • the annual wear and tear allowance made to the lessee in the period as a result of this section applying to the relevant lease.

(9) Where an individual lessee makes an election to be taxed under this section, both the lessor (where resident and subsection(3)(b)(i) applies) and the lessee shall be required to include the following details in their annual tax return:

  • the following information in respect of each relevant lease to which subsection(3)(b) applies—
    • confirmation that the appropriate election (under subsection (3)(b)) was made for this section to apply,
    • whether the lessee is an associated enterprise of the lessor, for the purposes of Chapter 4 of Part 35C (defined in section 835AA),
    • the open-market price (within the meaning of section 289(1)) of the leased asset;
  • the following totals in respect of subsection(3)(b) leases—
    • the total number of such relevant leases in the period,
    • the total value of machinery or plant allowances on assets so let in the period, and
    • the total open-market price (within the meaning of section 289(1)) of such leased assets immediately prior to the lease being entered into.

Capital Gains Tax implications of section 299

(10) Section 539 (which deems the disposal of an asset which is leased with an option to purchase to have occurred when the lease is entered into) will only apply to leases of plant or machinery to which section 299 applies.

Relevant Date: Finance Act 2024