An equipment lease agreement is a contract-based agreement where the lessor, who is the owner of the equipment, permits the lessee to use the equipment for a particular duration in return for cyclic payments. The subject of the lease can be vehicles, factory machines, or any other equipment. After the lessor and lessee have agreed to the terms of the lease, the lessee gets the authority to use the equipment and, in exchange make recurring payments in the time course of the lease. Although, the lessor maintains ownership of the equipment and has the authority to cancel the equipment lease agreement if the lessee violates the terms of the agreement or involves in an illegal activity utilising the equipment.

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Types of Equipment Leases

Equipment leases are can be broken down into the following categories:

Capital Lease

A capital lease is generally long-term and non-cancellable and is utilised to lease equipment that the company wants to employ in the long term or buy at the end of the lease period. In this lease, the lessee is accountable for keeping the asset and paying any insurance and taxes related to the equipment. The equipment’s assets and liabilities are registered in the lessee’s balance sheet in the lease period. Businesses opt for this kind of lease when renting costly capital equipment which they might not have the funds to buy instantly.

Operating Lease

An operating lease is generally short-term and terminable prior to the expiry of the lease duration. It is normal for businesses which wish to utilise the equipment for a brief period or substitute the equipment at the end of the lease. The lessor maintains ownership of the equipment and endures the risk of turning obsolete. A lessee can terminate the equipment lease agreement, with prior notice, at any time preceding the expiry of the lease period, however generally with a penalty.

Aside from these two kinds of leases, there are other kinds of equipment leases which integrate the characteristics of capital and operating leases to match the requirements of both parties. For instance, the lessor can choose a hybrid equipment lease for tax and financial benefits. Leveraged leases permit the lessee to finance the lease cost by releasing debt and equity against the equipment lease payments.

 Reasons to Lease Equipment instead of Purchasing

Equipment financing offers some benefits to a certain extent for business owners as it provides them the opportunity to acquire the most practical and helpful equipment minus the absurd up-front payments for the complete equipment cost. There are many advantages of equipment financing for business owners, covering features like raise in working capital, the potential to employ the ideal equipment, the tax advantages related with equipment financing, liberating other lines of credit, and the simple application method.

Let’s look at some essential advantages below :-

Reduced Initial Costs

The main benefit of leasing business equipment is that it enables you to attain assets with negligible initial costs. As equipment leases barely needs a down payment, you can acquire the goods you require without essentially impacting your cash flow.

Tax Deductible

Lease payments can generally be deducted as business expenses on your tax return, lowering the remaining cost of your lease.

Flexible Conditions

Leases are generally simpler to acquire and have more flexible conditions than loans for purchasing equipment. This can be an essential benefit if you have bad credit or require to arrange a longer payment plan to reduce your costs.

Convenient to Update Equipment

Leasing permits businesses to tackle the concern of being obsolete. If you use your lease to acquire items which can be obsolete in a brief duration of time, like computers or any other high-tech equipment, a lease transfers the worry of obsolescence to the lessor. This gives you opportunity to lease new, higher-end equipment after your lease expires.

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Labuan Leasing License

Labuan Leasing signifies the business of letting or sub-letting property-on-hire with the intent of the utilising such property by the hirer/lessee, irrespective of whether the lease/let is with or without a choice to buy the property.

The term ‘property’ entails the following:

1. Plant and machinery
2. All kinds of equipment
3. Chattel – attached or to be attached to the earth
4. Ships – bare boat charters only, apart from the transportation of passengers or cargo by sea or the charter of ships on a voyage or time charter basis.

Tax Benefits of a Labuan Leasing Company

• 3% corporate tax on net audited profits
• No withholding tax on dividends, interest, technical fee and royalty / lease rental
• No stamp duty on all instruments including share transfers
• No import duty / sales tax
• No foreign exchange controls
• No capital gain tax and inheritance tax
• Enjoy Malaysia’s Double Tax Agreements with over 70 countries
• 50% personal tax exemption for expatriate professionals employed by the leasing company
• 100% tax exemption for director’s fees received by non-citizen directors

With banking facilities in accordance to both traditional and Islamic principles provided by Labuan banks, along with a solid and low taxation framework, Labuan IBFC stands out as a notable leasing hub in the Asian region. To acquire a Leasing License in Labuan, or to know about equipment leasing, get in touch with our QX Trust team of consultants at CONTACT US or consultant@qx-trust.com.