Several new modes of financial leasing with greater impact

Financial leasing company's operation mode is extremely diverse, in the original model based on a slight modification is a new mode of operation, so there are constantly innovative models. However, the so-called "all changes are not the same", after mastering the British tax leasing, German tax leasing and Japanese tax leasing, you can basically understand the basic mode of financial leasing, summarize the laws, understand or independently innovate other more complex modes.

(1)UK Tax Lease Mode: Giving full play to the function of tax avoidance

UK Tax Lease (TaxLease) is a kind of structured lease to reduce the financing cost by utilizing the provisions of the UK tax law on the tax deductions and exemptions for the investment of large-scale equipments by the domestic investors. The process is as follows:

U.K. law provides that a local company purchasing a large transportation vehicle can take accelerated depreciation of 25% of the book value at the end of the previous year, with depreciation deducted on a pre-tax basis. A large transportation tool is purchased at the expense of a UK indigenous company, A, as lessor, and leased to another UK company, B (lessee), for use. During the first few years of the equipment's acquisition, the rent will necessarily be less than the depreciation. Thus, the lessor can use this depreciation expense to offset some of its profits and reduce its tax payments. The lessor can return a portion of this gain to the lessee in the form of lower rent, so the latter's financing costs are reduced.

In practice, let's say a foreign investor F wants to invest in an aircraft and use a UK tax lease to make a profit.

The first step is to register an SPC (shell company) K in the tax-free port of Cayman.

The second step is to negotiate with A: to use the aircraft to lease back the aircraft from K to A. The second step is to negotiate with A to lease back the aircraft from K to A.

In the third step, A can pay 20% of the purchase price by itself and pledge the other 80% to the bank with the airplane, and assign the right to collect rent from K to the bank as well, and then negotiate a leveraged lease with the bank. Since A's investment in the aircraft is subject to accelerated depreciation, A leases the aircraft to K at a below-market rate to transfer some of the tax benefits to K.

Step 4: K leases the aircraft from A and then leases the aircraft, at a slightly below-market rate, to a British company, B. Since this rate is below market, B is happy to lease the aircraft.

In the fifth step, K obtains rent from B and pays rent to A. The difference is the amount of rent K obtains. The difference in the middle is the profit made by K.

Sixth step, finally, because Cayman is a tax-free port, K can transfer this profit at nearly zero cost to F. F gets the difference in rent as profit; A gets below-market rent. All are happy and get rental income + retained tax credit income; only the UK government collects less tax.

(2) Germany KG model: give full play to the "capital-raising" function

KG for the German Kommanditgesellschaft abbreviation, its meaning is limited liability partnership. Germany's KG financial leasing market share since 1999 continued to grow, in 2004 its financing volume of more than 7.2 billion euros.

Germany started the KG ship finance system in 1969 as a tax incentive to encourage individual investors to invest in shipbuilding, and in the 1970s the German KG model was established to raise private capital to finance more projects.

The KG model has two forms: the KG company and the KG fund. KG can only be a single project company/single ship company, and KG is dissolved at the end of the project, similar to a SPC (single purpose company).

KG Company is a partnership with partners categorized into limited liability partners and unlimited liability partners, similar to the definition of partnership in China. In order to raise sufficient funds, the promoters (generally unlimited liability partners) set up a legal entity to invest a small amount of capital and then issue share capital to individuals who are private investors. A large number of individual investors are partners with limited liability, and their liability is limited only to their capital contribution. After raising sufficient funds, the company uses the funds as its own, and at the same time, it applies for a project loan from a bank to purchase a vessel and mortgages the vessel to the bank. The vessel is then placed in the care of the operating company and leased to the operator. The government allows KG to accelerate depreciation, so in the first few years the individual investors realize a tax benefit by taking a share of KG's net losses to offset their other tax liabilities; in subsequent years they receive annual dividends in return for their investment.

KG funds are similar to KG companies, except that the sponsor is changed to a brokerage firm and the fundraising method is changed to a closed-end fund. The brokerage firms charge high commissions.

Germany used to allow KG funds to depreciate 82 percent of a new ship over five years and to allow annual losses of no more than 125 percent of the price of the new ship. Currently, tax law allows depreciation of only 6.67 percent per year, with double depreciation allowed only in the first two years.KG funds also benefit from the convenience of the European tonnage tax at the same time.

This model is a good source of social capital and allows tax benefits to be shared between investors and lessees. It operates on a time charter basis and can meet the needs of shipping companies for choice of charter period, choice of year, and even eventual purchase of the vessel.

(3) Japan's operating lease model: give full play to the leveraged financing function

Japan's tax leasing has gone through three stages of development, 1988 to 1998 Japan's leveraged leasing is very popular, the use of accelerated declining-basis depreciation method, which produced a huge cross-border transaction market; the second stage is the Japan's operating leasing, due to the April 1999 Japan carried out the tax law reform, the advantages of the original leveraged leasing model are no longer available, for this reason, Japanese investors in order to maximize the use of tax resources, the distribution of tax benefits between the lessor and the lessee, innovation of a new form of financial leasing operating leases; the third stage is the operating lease with a purchase option.

(1)Leveraged leasing in Japan

1988-1998, Japan has a huge market for leveraged leasing cross-border transactions, which is commonly adopted by the Japanese aviation industry. First a brief introduction to leveraged leasing. In the case of depreciation/capital allowances, the lessor recovers the cost of the "purchased" asset from operating income through periodic deductions or offsets ("allowances") based on time. There are two ways to do this: a lessor using straight-line depreciation requires that the same amount or percentage of the asset be recovered each year; a lessor using declining-balance depreciation requires that the asset be recovered each year as a constant percentage of the asset's residual cost; and a lessor using accelerated depreciation requires that a greater amount be deducted in the first few years of the depreciable life of the asset. In terms of tax benefits, the taxpayer's tax liability is reduced in the corresponding fiscal year or period as a result of tax concessions or exemptions. Assets with a long economic life are best suited to be tax products.The Amendment to the Tax Law of Japan, which has been in effect since April 1999, has made cross-border tax leases disappear, and the application of tax leases to non-Japanese residents and non-Japanese corporations outside of Japan is now limited to the use of the straight-line depreciation method. Thus the advantage of Japanese tax leasing is gone.

(2) Japanese Operating Lease

Japanese investors, in order to maximize the tax benefits, have innovated the Japanese-style operating lease by applying the double-declining depreciation method, which distributes the tax benefits between the investor (lessor) and the operator (lessee).

The lessor of an operating lease has to get a high economic return, but also has to bear a great deal of risk. The lease contract does not have to be a full payment lease contract, and the rent does not have to be more than 90% of the leased asset, but the purchase option must be based on a fair market price. The lessor should assume the risk of the residual value of the asset.

(3) Japan's operating lease with option

Japan's operating lease with option, the main players and basic information as shown in Table 5.

The following illustration envisions a cascading lease from the lessor to the lessee (as the end-user of the aircraft). This basic lease structure can be used for any tax, legal or other issues associated with the lessee or any other counterparty.

Table 5, Operating Lease Structure with Option in Japan

Participants

Basics

Lessee

Operator of the relevant leased product (e.g., an aircraft)

Lessor

Special Purpose Vehicle (SPV)

Japanese investor(s)

One or multiple Japanese investors, arranges investment (approximately 20-30% of the cost of the equipment, depending on the transaction and assets) to the lessor in accordance with Japanese investment laws.

Parent

A Japanese leasing company, acting as the parent company of the lessor, will guarantee or support the lessor's claims to lessees and borrowers to fulfill their obligations.

Financier

An international bank or an international conglomerate invests approximately 70-80% of the cost of the equipment as a recoverable loan through its branch in Japan. As agreed, the loan can be at a fixed or floating exchange rate and can be denominated in US dollars or Euros.

Residual Value Guarantee Providers

Guarantee entities that are recognized by both lessors and lessees (trustworthy in the field of residual value guarantees).

Transaction Provider

An entity that can be recognized by both lessors and funders.

The basic transaction structure is:

1) On the closing date, the lessor will purchase the aircraft from the manufacturer (e.g., a new aircraft) or by the lessee (e.g., a sale-leaseback) for the purchase price (a fair cost price of the aircraft given by an independent appraiser). The lessor will simultaneously lease the aircraft to the lessee.

②The Japanese investor will invest 20-30% of the purchase price in the lessor (hereinafter referred to as the "Japanese investor").

3) The contributor invests approximately 70-80% of the purchase price in a limited recourse loan to the lessor (hereinafter referred to as the "Loan").

4) The lessor and the lessee enter into a lease agreement (e.g., a lease agreement of 10 to 12 years, called a "full lease agreement").

5. The lease contract includes an option to purchase at a specific location at a specific time (e.g., 7-9 years) ("FPPO") at a fixed purchase price equal to the pre-agreed fair market price of the aircraft at the time of the FPPO.

6. If the FPPO is utilized, the FPPO price paid by the lessee to the lessor will be sufficient for the lessor to pay the outstanding balance of the funds raised by the financier and the funds contributed by the Japanese investors. Using the FPPO and its price, the lessor will share part of the benefits of the aircraft lease with the lessee to form the transaction.

7 If the lessee does not use the FPPO, the lease terms will remain in effect until after the end of the full lease terms (e.g., a longer two years). The rent payable during the remaining two years will fully cover the rent to the extent that only the Japanese investor has an unpaid balance at the end of the lease agreement. At the end of the agreement the lessee would have no option to buy.

Imagine a situation where, at the end of the lease agreement, the initial borrowing is repaid in full and the contributor does not bear any residual value risk, so the transaction can be considered a fully paid financial lease (the contributor bears only the credit risk of the lessee). Therefore, the borrowing at the beginning of the period should be priced at the standard guaranteed borrowing balance.

8 If the lessor is able to benefit from the residual value guarantee provided by the residual value guarantee provider, it will mitigate any downward trending exposure in case the value of the aircraft falls below the outstanding investment balance of the Japanese investor.

The salvage value guarantee will be utilized on a specific window date (i.e., the expiration date of the agreement) and will be set at a level acceptable to the Japanese investor and the Japanese tax advisor for their analysis of the leasing business. The residual value guarantee will disappear if the FPPO is utilized or if the FPPO agreement is terminated at an earlier date for whatever reason. The Residual Value Guarantee includes all Japanese investments and the Japanese investor will always bear the maximum asset value risk.

⑨The Leasing Parent will guarantee/support the obligations of the Lessor to the Lessee under the Lease Agreement.

(10) If the Lease Agreement is terminated for any reason (e.g., default by the Lessee), the total termination amount payable by the Lessee will be set at a level sufficient to repay the entire Loan and, depending on the reason for the early termination, sufficient for the Japanese Investor as well.

2, China's financial leasing company's main mode of operation

(1) simple financial leasing

Also known as "direct leasing" or "traditional financial leasing". The lessor buys the leased object according to the lessee's choice, leases it to the lessee, who pays the rent for each installment according to the lease agreement and sells the ownership of the leased object to the lessee at a nominal price at the end of the term. The lessee has no ownership rights during the entire lease period, but enjoys the right to use and is responsible for repairing and maintaining the leased object. The lessor is not responsible for the good or bad of the leased object, and depreciation of the equipment is on the lessee's side.

(2)Sub-leasing

Article 48 of the Measures for the Administration of Financial Leasing Companies defines sub-leasing as "a financial leasing business that involves multiple leasing operations with the same object as the subject matter. In the subleasing business, the lessee of the previous lease contract is also the lessor of the next contract, which is called the sublessor. The sublessor rents the leased object from another lessor and subleases it to a third party, and the sublessor collects the difference in rent for the purpose of leasing. The ownership of the leased object is vested in the first lessor."

The lessor in the first level of financial leasing contract is called "the first lessor", and the lessee in the last level of financial leasing contract is called "the final lessee". The difference between the sublessor and the first lessor is that the sublessor is not the contributor in the financial leasing transaction and the owner of the leased object. The reason why it can transfer the right to possess, use and gain from the use of the leased object to a third party as a lessor is that it has been assigned these rights as a lessee in the previous level of financial leasing contract. Moreover, the previous level of the financial lease contract provided that it had the right to transfer those rights to third parties. The sublessor is distinguished from the ultimate lessee in that it does not lease the leased object for the purpose of possessing, using and deriving a benefit from its use. It takes the leased object for the purpose of transferring to a third person the right to possess, use and gain from the use of the leased object.

The above characteristics of subletting determine the following points:

Firstly, the subject matter of the financial leasing contract at each level must be the same;

Firstly, in general, the lease term of the financial leasing contract at each level should also be the same. However, in any event, the expiration date of the lease term of the financial lease contract of the next level shall not be later than the expiration date of the lease term of the financial lease contract of the previous level;

Thirdly, the financial lease contract of each level shall not be more restrictive as to the vesting of the leased object at the expiration of the lease term (. Retention, renewal or repossession) of the agreement must be uniform.

This way of doing business is generally done internationally. In the practice can be very flexible, and sometimes leasing companies even directly the purchase contract as a leased asset to sign a sublease contract. This practice is actually the leasing company to finance the funds in a way, the leasing company as the first lessee is not the end user of the equipment, and therefore can not withdraw the depreciation of the leased object.

(3) Leaseback type financial leasing

Also known as "sale and leaseback", "sale and leaseback" or "leaseback", "Financial Leasing Company Management Measures". Article 47 of the Measures for the Administration of Financial Leasing Companies stipulates that "The leaseback business referred to in these Measures refers to the form of leasing in which the lessee sells its own objects to the lessor, and at the same time enters into a financial leasing contract with the lessor, and then leases the objects back from the lessor. A leaseback is a special type of financial lease in which the lessee and the seller are the same person."

The Accounting Standard on Leasing (ASLE) has a special section on "Sale and Leaseback Transactions", which provides for the accounting treatment of leaseback transactions in Articles 35-38.

Leaseback is an internationally recognized financial leasing transaction, which has been widely adopted in China. In practice, the leaseback transaction with the direct financial leasing transactions, is also by the sale and lease transactions, the two mutually conditional, inseparable transactions. That is to say, first of all, by the financial leasing Division to buy the identity of the seller with the seller of the enterprise to enter into a contract of purchase and sale (or "transfer of ownership agreement"), the purchase of the enterprise's own physical property (in the "financial leasing company management measures" in the provisions of the "fixed assets"), in the "international financial leasing company management measures" in the "fixed assets". " in the Measures for the Administration of Financial Leasing Companies and "property, plant and equipment" in the International Financial Leasing Convention). In the sale and purchase contract, the obligation of the financial leasing company was to pay the price of the goods under the sale and purchase contract and its right was to acquire ownership of the goods. At the same time, the financial leasing company, in its capacity as lessor, entered into a financial leasing contract with the enterprise as lessee, and leased the goods under the sale and purchase contract to the enterprise as leased goods. In that financial leasing contract, the responsibility of the lessor is to transfer to the lessee, within the stipulated period of the lease, the exclusive right to the possession, use and proceeds through the use of the leased goods, and its right is to collect the rent.

In order for a leaseback transaction to be legally accomplished, first of all, the goods to be sold must be property which the enterprise itself owns and which has not been mortgaged to any person, and, of course, still less property which is the subject of litigation or which has been included in the bankruptcy estate of the enterprise. In order to confirm this, it is usually necessary to go through some kind of procedure to confirm the property right, for example, the notarization of the ownership of the property, etc.; Secondly, as the fixed assets of the enterprise, the sale of which also needs to have certain approval procedures. For example, in the case of state-owned enterprises, there needs to be the approval of the appropriate state-owned assets management department; the price of the above sale transaction by the buyer and seller to agree. But usually there must be a reasonable, not contrary to the accounting standards of the value of the basis for reference, such as the book value of the property or the fair value of the qualified asset appraisal organization assessment, etc..

Since the sale and lease-in in a leaseback occur simultaneously. There is no movement of things as in the usual sale of goods. Legally speaking, the basis for determining that a transaction is a financial lease transaction by way of leaseback is not only the contractual documents mentioned above, but also the notarization of the transaction and the publicity procedure after the improvement of our property rights legislation. Judges usually recognize a transaction as a leaseback transaction on the basis of the contractual documents in force. In specific cases, they also distinguish a leaseback transaction from a disguised borrowing on the basis of the lessee's accounting treatment of the asset and, in particular, on the basis of whether or not the notarization procedure has been carried out.

For accounting purposes, before the leaseback, the physical property was part of the enterprise's assets in its financial statements. After the leaseback, the physical property is deducted from its fixed assets and the value of its fixed assets is reduced accordingly. At the same time, as a result of the sale price, the enterprise's current assets are increased by cash or bank deposits, which is essentially the same as the decrease in fixed assets mentioned above.

Assets leased under finance leases are managed as "fixed assets under finance leases". The value of the asset forms part of the total assets of the enterprise and can be depreciated in accordance with the special regulations of the Ministry of Finance and the State Planning Commission. Correspondingly, a rent payable is added to the liability column of the enterprise.

(4) entrusted leasing

The entrusted leasing refers to the enterprise without the right to lease, entrusted with the right to lease the enterprise to complete a lease business. The trustee here, is authorized to have the qualification of operating financial leasing business, regardless of the approval of the establishment of the People's Bank of China or the Ministry of Foreign Trade and Economic Cooperation. Therefore, it must be the lessor of the relevant financial leasing contract at the same time. According to the provisions of paragraph (3) of Article 1 of Chapter 3 of the Measures for the Administration of Financial Leasing Companies, i.e., a financial leasing company "may accept the entrustment of leasing funds by a legal person", it is obvious that a financial leasing company may enter into a trust contract with a principal in the capacity of a trustee as long as the principal is a legal person. The trust contract by the Chinese people's *** and the State Contract Law of the general provisions of the adjustment at the same time, priority by the Chinese people's *** and the State Trust Law adjustment. Regulated entrusted lease, is a completely legal trust activities.

There is no concept of borrowing, of course, not to mention "disguised" or not. It is inappropriate to consider entrusted leasing as disguised lending. The reason why the term "entrusted lease" appeared, just to explain, in this kind of business the lessor used in the source of funds of special characteristics, and therefore the lessor neither bear the risk of the use of such funds, nor enjoy the benefits of the use of such funds. Businesses in general take advantage of the separation of ownership and use of leases to enjoy accelerated depreciation and circumvent policy restrictions. E-commerce leasing also relies on delegated leasing as a platform for business leasing.

(5) leveraged leasing

Also known as "borrowing lease", also called "equitable leasing". Leveraged leasing is also a combination of trust and financial leasing. Leveraged leasing and entrusted with the difference is: (1) in the leveraged lease, the trustee (lessor) is not completely free of financing risks, but only a small portion of the amount of leasing financing (for example, 20% -40%) of the risk; (2) in the leveraged leasing, the trustee is often more than one, but there are a number of; (3) the motivation of the contributor is different. In addition to the above differences, the two legal relationships and operating procedures are completely similar.

Leveraged leasing is similar to the practice of syndicated loans, is specialized in large-scale leasing projects a financial lease with tax benefits. It is mainly led by a leasing company as the backbone company to finance a mega leasing project. First of all, set up a leasing company from the main body of the operating organization - specifically for the project to set up a fund management company, out of the total amount of the project more than 20% of the funds, the rest of the source of funds is mainly to absorb the banks and the community of idle capital, the use of "to two Bo eight" of the bar way, for the leasing project to obtain a huge amount of funds. The rest of the source of funds is mainly to absorb banks and social idle capital, and utilize the "two for eight" bar method to obtain huge funds for the leasing project. The rest of the practice and simple financial leasing is basically the same, but the complexity of the contract due to the wide range, and then increase.

Operation standardization, comprehensive benefits, rent recovery security, low cost, generally used in aircraft, ships, communications equipment and large sets of equipment for financial leasing.

(6)**** enjoy structured leasing

Also known as the "share of the lease" or "variable rent lease". It is a form of lease that links the rental income with the revenue from the use of the equipment. After the lessee pays a certain amount of basic rent to the lessor, the rest of the rent is paid as a percentage of the lessee's operating income. The lessor actually assumes some of the risks and rewards of the leased property.

About this kind of lease is reasonable and legal? Theoretical circles are divided. Qiu Qiyang, vice president of the financial leasing branch of the China Finance Association, believes that the rent of the *** enjoyment structured lease, since it is random, may be both more and less. In the extreme, in the event of the lessee's business failure, there may even be none. Under such conditions, can the transaction be regarded as a substantial transfer to the lessee of the risks and rewards of ownership of the leased property? Certainly not. Since it can not, this kind of transaction can still be regarded as a financial leasing transaction? Obviously not.

Because in the "enterprise accounting standards" clearly stipulates: "finance lease is a lease that substantially transfers all the risks and rewards associated with ownership of the asset. Ownership may or may not ultimately be transferred." However, if the ****Helpful Structured Lease Contract is a finance lease contract according to the provisions of Chapter 14 of the Contract Law of the People's Republic of China, "Finance Lease Contracts", and its rental method is based on the provisions of the Contract Law of the People's Republic of China. And its rental method is based on Article 243 of Chapter XIV of the Contract Law of the People's Republic of China*** and the State of China "Financial Leasing Contracts", 'The rent of a financial leasing contract shall be determined on the basis of most or all of the cost of purchasing the leased object and the lessor's reasonable profit shall be determined',. The law purposely gives the parties the right to agree otherwise, aiming to leave room for a flexible approach to rent. This can be referred to the interpretation of the Research Office of the Legislative Affairs Commission of the National People's Congress", but at present, in the field of international and domestic financial leasing, in addition to retaining the traditional way of fixed rents, more and more flexible, multi-form, non-fixed rent payment methods have been adopted to adapt to the increasingly complex financial leasing relationship and the needs of the parties. In the most financial leasing transactions, the parties often determine the size and manner of payment of rent based on the lessee's use of the leasing business or the revenue obtained through the use of the leased property". At the same time, *** enjoyment structured leasing is also in line with the recognition criteria for financial leasing in "Enterprise Accounting Standards I I Leasing". For example, its lease term is then more than 75% of the equipment's useful life. Indeed, structured *** enjoyment type lease both the nature of the lease and the nature of the investment, however, according to the corresponding regulations and standards to determine, structured *** enjoyment type lease should belong to the finance lease.

There is another type of ****entitlement structured lease, where the lessor leases the equipment to a specific lessee in the form of a lease claim and investment, and the lessor receives rentals and shareholders' equity as a return on its investment in a lease transaction. In short

in other words, it is a form of lease in which the lessor receives a portion of the lessee's shareholders' equity as rent.

(7) comprehensive leasing

It extends the connotation of financial leasing, in addition to providing financial services, but also provide operational services and asset management services, is a comprehensive all-round leasing services, leasing income is therefore expanded and the risk is therefore reduced, so that the leasing of the more obvious characteristics of the service trade. Completion of this comprehensive service requires comprehensive talents, thus also reflecting the important position of knowledge in the service, the development of comprehensive leasing, the mature leasing industry into the era of knowledge-based economy.

(8) Innovative leasing

Leasing in China, has entered the third stage of development, namely: innovative leasing. It is to protect the interests of all parties to the lease at the same time, the risk will be dispersed among the parties. The specific practices are flexible and varied. In fact, it has combined traditional financial leasing and operating leasing to develop into modern leasing. Because of the need for innovation, the approach to each project will be different. Innovation is the life of modern leasing business.