A finance lease is one which is constituted by the lease of an asset on or after 1st January 2005 which lease involves the payment by the lessee to the lessor over a number of years of the full, or nearly the full cost of the asset, together with a return on the finance provided by the lessor and such other remuneration as may be reasonable in the circumstances of the case. 

Within the finance lease, the lessee shall assume substantially all the risks and rewards normally associated with the ownership of the asset, other than the legal title which remain vested with the lessor. 

A contract of lease shall qualify as a finance lease where: 

(i)The lessor is a finance leasing company; and 

(ii)The period of the lease is for a period of four (4) years or more, and is not shorter than the period of the asset's depreciation as established in the Schedule to the Deduction (Wear and Tear of Plant and Machinery) Rules, 2000; and 

(iii) Notification of the lease contract is made to the Commissioner by the finance leasing company within three (3) months of the signing of the lease contract on the prescribed form, together with an authenticated copy of the lease agreement. 

A company qualifies as a finance leasing company if it is a duly licensed financial institution which has its objects expressly limited to that of being engaged solely in the business of granting finance leases, and in such other acts and activities as are necessary for the conduct of the said business. A finance leasing company also refers to a company incorporated outside of Malta which is of a similar nature.  

1.1.Determination of Chargeable Income 

For the purposes of determining the income which shall be chargeable to tax of a lessor and of a lessee, the following arrangements shall apply in situations which qualify as a finance lease:  

(i)The lessor shall be chargeable to tax on the full amount of the annual lease payments, without prejudice to the right for deductions as allowable under the ITA; 

(ii)The lessor shall also be entitled to a deduction in respect of the wear and tear of the leased asset in accordance with the provisions of the ITA; 

(iii)The lessee shall be entitled to a deduction in respect of the full amount of the lease payments made by him in respect of the leased asset as well as all other deductions allowable under the provisions of the ITA. 

Any losses incurred by a finance leasing company can only be set-off against profits from the same activity. 

The provisions within the Finance Leasing Rules shall only apply where no other benefits are being claimed on the same asset under any other legislation which grants fiscal incentive schemes. 

1.2.Payment on transfer of ownership 

Where on the occasion of the transfer of the title of ownership over a leased asset the lessee makes a payment to the lessor in excess of the total agreed lease payments, such payments shall be chargeable to tax in the hands of the lessor.  

1.3.Termination of lease before due date 

Where a finance lease is terminated prior to the expiration of the lease term the following shall apply: 

(i)Where a lessor obtains repossession of the leased asset and enters into a second or subsequent lease agreement in respect of the same asset, the total of the deductions for wear and tear to which the lessor is entitled shall be equal to the total deduction for wear and tear not availed of under the previous arrangement; 

(ii)The finance leasing company and the lessee shall both be under an obligation to give notice to the Commissioner of Inland Revenue of the said termination. Such notice shall be given within thirty (30) days of the termination of the arrangement. 

1.4.Restriction of group relief 

A finance leasing company shall be deemed not to constitute part of a group of companies for the purposes of the group relief provisions within the ITA. 

2.Tax treatment for other finance leasing arrangements of aircrafts 

The Inland Revenue Department ('IRD') has issued the following tax guidelines which relate to instances where a finance lease does not fall within the provisions of a finance lease as defined in paragraph 1 above.  

(i)The lessor is charged to tax on the annual finance charge, which is the difference between the total lease payments less the capital element, divided by the number of years of the lease; 

(ii)The lessee is allowed a deduction in respect of the following: 

a.The finance charge; 

b.Maintenance; 

c.Repairs; and 

d.Insurance; 

(iii)The lessee is allowed capital allowances in respect of the aircraft, however the parties may not opt to shift the burden of wear and tear onto the lessor; 

(iv)Where the lessee exercises an option to purchase the aircraft on the termination of the finance lease, and the lessor is not trading in the purchase and sale of the aircraft, the purchase price received by the lessor shall be considered to be of a capital nature and no tax thereon shall be payable by the lessor. 

3.Conclusion 

The IRD guidelines shall be adopted for each year during which the duration of the finance lease is in existence and shall apply to finance leasing companies which are resident and domiciled in Malta.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.