The acquisition of assets, specifically costly capital equipment is a huge commitment for many businesses. The process for acquiring the funds requires careful planning.

Instead of paying for the asset outright using cash, it frequently makes sense for businesses to seek methods of spreading the cost of acquiring an asset, to coincide with the timing of the revenue generated by the business. The most common sources of medium-term finance for Investment in Capital Assets are ‘Hire Purchase’ and ‘Leasing’.

Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. The business customer selects the equipment it needs and the finance company purchases it on behalf of the business.

Need for Finance Leasing

The finance lease or ‘full pay out lease’ is closest to the hire purchase alternative. The Leasing Company recovers the full cost of the equipment, plus charges, over the period of the lease.

Although the business customer does not own the equipment, they have most of the ‘risks and rewards’ associated with ownership. They are responsible for maintaining and insuring the asset and must show the leased asset on their balance sheet as a capital item.

When the lease period ends, the leasing company will generally agree to a secondary lease period at significantly reduced payments. Optionally, if the business wants to stop using the equipment, it can be sold second-hand to an unrelated third party. The business arranges the sale on behalf of the leasing company and acquires the bulk of the sale proceeds.

Advantages of Leasing

The use of hire purchase or leasing is a popular method of funding the acquisition of capital assets. Although, these methods are not necessarily optimal for every business or for every asset purchase. There are a number of considerations to be made, as mentioned below :-

1) Certainty

One essential benefit is that a hire purchase or Leasing Agreement is a medium-term funding facility, which cannot be withdrawn, on the condition that the business makes the payments as they fall due. The uncertainty which can be related with optional funding facilities like overdrafts, that are repayable on demand, is eliminated.

2) Budgeting

The common nature of the hire purchase or lease payments (that are also generally of fixed amounts as well) helps a business to predict and better manage cash flow. The business is able to compare the payments with the expected revenue and profits generated by the use of the asset.

3) Fixed Rate Finance

In most scenarios, the payments are fixed throughout the hire purchase or lease agreement, so a business will know at the beginning of the agreement what their repayments will be. This can be advantageous in times of low, stable or rising interest rates but can seem expensive if interest rates are falling.

4) Impact of Security

Under both hire purchase and leasing, the finance company keeps legal ownership of the equipment, at least until the end of the agreement. This generally provides the finance company better security than lenders of other kinds of loan or overdraft facilities. The finance company can therefore be able to provide better terms.

5) Maximum Finance

Hire purchase and leasing could offer finance for the complete price of the equipment. There can although, be a need to put down a deposit for hire purchase or to make one or more payments in advance under a lease. It can be possible for the business to ‘trade-in’ other assets which they own, as a means of raising the deposit.

6) Tax Advantages

Hire purchase and leasing give the business the option of how to take benefits of capital allowances. If the business is profitable, it can claim its own capital allowances via hire purchase or outright purchase.

Labuan Leasing License

“Labuan Leasing” refers to the business set-up or domiciled in Labuan and offering letting or sub-letting property-on-hire for the intent of the use of such property by the hirer or a lessee, irrespective of whether the lease/let is with or without an option to purchase the property.

Definition of ‘property’ includes the following :-

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

Typical Labuan Leasing Structures

Labuan Leasing Structure: Foreign Co-asset Owner

Benefits:-

• Labuan Leasing Company is taxed at 3% of net audited profits
• No Withholding Tax on lease rental received from Malaysian customers
• No Withholding Tax on lease rental payable by Labuan Leasing Company to Foreign Company
• Access to more than 70 Malaysia Tax Treaty partners to reduce Withholding Tax on lease rental received by Labuan Leasing Company from Foreign Customers
• Liberal exchange control environment in Labuan

Labuan Leasing Structure: Foreign Financier

Benefits :-

• Labuan Leasing Company is taxed at 3% of net audited profits
• No Withholding Tax on lease rental received from Malaysian Customers
• No Withholding Tax on interest payment payable by Labuan Leasing Company to Foreign Financier
• Access to more than 70 Malaysia Tax Treaty partners to reduce Withholding Tax on lease rental received by Labuan Leasing Company from Foreign Customers
• Liberal exchange control environment in Labuan

Tax Advantages of 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

If your business is dependant on huge machineries to support your business operations and you would like to understand how you can benefit from a Leasing structure via Labuan, do contact the QX Trust consultants at +60 3 9212 6940  or consultant@qx-trust.com for a free consultation.