International leasing of industrial equipment
TAX HIGHLIGHTS IN FRENCH-SPEAKING AFRICA
International leasing of industrial equipment is essential in certain sectors (oil & gas, mining, ports, construction, air transport, etc.) requiring the temporary use of expensive equipment intended for multi-jurisdictional use. The cross-border and intra-group nature of these transactions (where the equipment is wholly owned by a group company) calls for particular attention to be paid to tax issues.
KEY POINTS
When leasing is accompanied by other services, such as the provision of qualified personnel, the risk of characterizing the equipment as a permanent establishment must be assessed for the lessor.
In the absence of a permanent establishment, a withholding tax will be deducted by the lessee (except in the event of a tax treaty). Significant limitations on deductibility by the lessor may apply (particularly in the CEMAC zone).
The mode, duration and location of use of the equipment, particularly at sea or on the high seas, can be key factors in the analysis.
Others publications
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- Taxation of the oil sector in central Africa (CEMAC area)
- Reform of the OHADA law on movable securites
- International leasing of industrial equipment
- Foreign compagnies subject to a tax audit in France
Some industrial equipment (drilling RIGs, cranes, analysis equipment, etc.) is not intended to be held locally in full ownership, given its purely temporary use and its vocation to be used successively in several jurisdictions. Within groups of companies, an asset management company makes the necessary equipment available to the group's entities under leasing agreements.
RISK OF IDENTIFYING A PERMANENT ESTABLISHMENT OF THE LESSOR IN THE LESSEE'S JURISDICTION
When the leasing of equipment is accompanied by other services, in particular the provision of qualified personnel, particular attention must be paid to the precise scope of the services provided, in order to prevent the characterization of a permanent establishment subject to local taxation.
Where the lessor's activity goes beyond mere leasing, and where, for example, the personnel made available participate in decisions concerning the work for which the equipment is used, or operate, monitor or maintain the equipment under the responsibility and control of the lessor, the latter may be regarded as carrying on in the lessee's State a genuine business activity taxable in that State (OECD Comments 2017, C (5) n°36).
In certain specific sectors, such as oil, special regimes allow local taxation on a flat-rate basis (IS/IRPP), which can make it attractive to characterize a permanent establishment (e.g. in Côte d'Ivoire and Congo - the Gabonese RFS regime has been abolished as of January 1, 2022).
WITHHOLDING TAXES APPLICABLE IN THE LESSEE'S STATE
Under the terms of tax treaties, leasing is in principle a supply of services, the remuneration for which is taxable as business profits only in the State of the lessor (provided that the lessor does not have a permanent establishment in the State of the lessee as a result of its activity, see above).
However, several tax treaties concluded by French-speaking African countries depart from the OECD model by expressly assimilating to the category of royalties "remuneration of any kind paid [...] for the use of, or the right to use, industrial, commercial or scientific equipment" (e.g. Cameroon-Canada/France, Côte d'Ivoire-UK). Where such an assimilation is made, the rents paid to the lessor may be subject to withholding tax in the lessee's State, with a tax credit chargeable in the lessor's State.
Nota differences of interpretation with certain French-speaking African states on the scope of royalties (as defined by tax treaties, authorizing the source state to levy a withholding tax) may have generated double taxation when withholding taxes were levied even though the tax treaty did not assimilate the rentals to a royalty (See French Conseil d'Etat ruling of 12. 10.2018 Smith International, for the case of a rental of drilling equipment in Cameroon, Congo, Algeria subject locally to withholding tax but which France rejected as a tax credit because it was deducted in contravention of the tax treaty).
VAT & CUSTOMS
As the service is in principle used/delivered locally on the customer's territory, local VAT (and associated taxes, such as Gabonese CSS) is payable. It is payable by the lessee on behalf of the lessor ("VAT on behalf of third parties" mechanism - sometimes with certain deductibility limits for certain services already available locally).
For customs purposes, leased equipment may benefit from specific suspensive regimes (ATN/ATS temporary admission regimes), or even reduced rates in certain sectors (oil & mining).
LIMITATIONS SPECIFIC TO INTRA-GROUP FLOWS
Limitation on deductibility of lease payments in the CEMAC zone
Some jurisdictions severely restrict the ability of a (locally-established) lessee entity to deduct equipment lease payments from its taxable income, when the sums are paid to its associates (prohibited in Cameroon; limited to annual depreciation payments in Gabon).
- Transfer pricing
In a recent case concerning the transfer pricing policy of a French company carrying out drilling operations in Gabon via a permanent establishment (CAA Versailles, 1st ch., July 5, 2022, no. 20VE02832), it was ruled that, given the establishment's functions and risks, which were deemed to be limited, the allocation of profits should be determined using a method based on the establishment's costs, plus a margin (established on the basis of a panel of comparable).
DEFINITION OF CUSTOMS AND TAX TERRITORY: SPECIAL CASE OF GOODS LOCATED AT SEA
When the leased equipment is in transit or, as the case may be, is operated at sea, particular attention must be paid to the texts governing the territorial scope of the lessee's State's tax and customs duties (Customs Codes, Merchant Marine Codes, Hydrocarbon Codes, laws establishing an EEZ, Montego Bay Convention, etc.).
Attention should be paid to the precise location of the property, as the maritime zone is determined by its distance from the coastal state. In order of proximity to the coast, a distinction can be made between territorial waters (up to 12 nautical miles), the contiguous zone (24 nautical miles, generally corresponding to the tax and customs control zone), the exclusive economic zone (200 nautical miles) and the continental shelf, it being specified that customs regulations may set a specific "customs radius".
The International Convention on the Law of the Sea (Montego Bay, Articles 60 and 80) also authorizes customs and tax regulations for "artificial islands" (in the exclusive zone, or even on the continental shelf out to 350 miles).
TRANSFER OF EQUIPMENT DURING THE LEASE PERIOD
If the equipment is sold during the lease period, particular attention must be paid to the associated risks in terms of customs (risk of jeopardizing suspensive regimes, release for consumption) and tax (corporation tax, registration duties).
FOREIGN EXCHANGE REGULATIONS
Specific formal checks on leasing contracts may be carried out by local banks (which will most often require the production of a leasing contract duly registered with the local tax authorities before executing transfers), it being specified that certain jurisdictions also provide for checks on the materiality of the service rendered (CEMAC exchange regulations provide for penalties of up to 100% of the price of the service).
