Legal Notice 369 of 2005 entitled the ‘Finance Leasing Rules’ (FLR) paves the way for a new vehicle known as Finance Leasing to be recognized by Maltese law and to come into force from a tax point of view as from the year of assessment 2006.
A Finance Lease is essentially an arrangement comparable to mutuum (or loan for consumption) where the lessor ‘lends’ a sum of money to the lessee for the purchase of an asset to which the lessor formally retains title as security and the lessee returns to the lessor, in several installments, the sum borrowed plus interest and finance charges.
Definition under the FLR
The Finance Leasing Rules (FLR) define ‘Finance Leasing’ as the lease of an asset on or after the 1st January, 2005, that has the following characteristics:-
- the lessor is a ‘finance leasing company’ defined as a company that is (i) licensed to act as a financial institution and (ii) has its trading objects expressly limited to that of engaging in the business of granting finance leases and of carrying out such other activities as are corollary and ancillary irrespective of whether it is incorporated in Malta or overseas;
- the period of the lease is for at least 4 years and is not shorter than the period of the asset’s depreciation ;
- the lessee must pay to the lessor over a number of years the full cost -- or nearly the full cost -- of the asset in addition to a profit/return on the finance provided by the lessor and such other remuneration as may be reasonable in the circumstances;
- the lessee must substantially assume all the risks and rewards normally associated with the ownership of the asset, other than legal title thereto; and
- within 3 months of concluding the finance leasing agreement, notice must be given by the finance leasing company to the Commissioner of Inland Revenue on the prescribed form together with an authenticated copy of the relative agreement.
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