Lease Agreement Qualifies as a Finance-Lease Contract

June 10, 1993 BIR RULING NO. 241-93 LEASE AGREEMENT QUALIFIES AS A FINANCE-LEASE CONTRACT 120 000-00 241-93 Consolidated Orix Leasing & Finance Corporation (COLF) 17th Floor, Solid Bank Bldg. 777 Paseo de Roxas, Makati Metro Manila Attention: Atty . Leonardo G . Ledesma This refers to your letters dated August 30, 1991 and March 9, 1992 requesting for an advance ruling on whether your lease agreement model and its auxiliary contract can be considered as a finance-lease contract for tax purposes pursuant to Section 5 of Revenue Regulations No. 19-86, as amended. It is represented that your company is regularly engaged in the business of lease financing as envisioned and covered by the Revenue Regulations No. 19-86, as amended, re: taxation of leases; that the lease agreements of COLF were drafted in accordance with the abovementioned Revenue Regulations; that copies of the said lease agreement model and its auxiliary contract were submitted to this Office for perusal; that in the past years however, BIR Revenue Officers have persistently refused to recognize the contract (lease agreement model and its auxiliary contract) as a finance-lease for tax purposes, hence this request. cdtech In reply, please be informed that Section 2 (2.01/2) of Revenue Regulations No. 19-86 defines finance lease as follows: "Finance lease or full payout lease" is a contract involving payment over an obligatory period (also called primary or basic period) of specific rental amounts for the use of a lessor's property, sufficient in total to amortize the capital outlay of the lessor and to provide for the lessor's borrowing costs and profits. The obligatory period refers to the primary or basic non-cancellable period of lease which in no case shall be less than 700 days. The lessee, not the lessor, exercises the choice of the asset and is normally responsible for maintenance, insurance and such other expenses pertinent to the use, preservation and operation of the asset. Finance leases may be extended, after the expiration of the primary period, by non-cancellable secondary or subsequent periods with the rentals significantly reduced. The residual value shall in no instance be less than five per centum (5%) of the lessor's acquisition cost of the leased asset." Such being the case, your lease agreement model and its auxiliary contract, as submitted to this Office, meet the requirements to constitute the same as a finance lease contract, pursuant to Revenue Regulations No. 19-86, as amended. It is understood, however, that this ruling is issued on the basis of the lease agreement model and its auxiliary contract received by this Office. Hence, this ruling shall not be applicable in the event any deviation therefrom occurs, or a different lease agreement model or auxiliary contract is used. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue