Legal Aspects of Lease Financing and Tax Treatment

Lease financing plays an important role as a financing instrument in many countries. It is a flexible financing instrument for projects. It gives the projects the ability to obtain equipment’s needed without having financial resources. The lesser can use lease financing according to his/her objectives and specifications through leasing equipment’s needed in return for rent installments during the lease period which is linked to the life time of the equipment. Three options are a viable to the lessor at the end of the lease contract. These are: Buying the equipment at a very small price, renew of the contract, and return back the equipment’s and terminate the contract. This study aims at looking at the lease financing from a legal point of view. The study consists of three chapters. Chapter one, discusses the historical background of this type of contract, it development, spread around the world, and definition within the different legal trends, in order to come up with a comprehensive definition. Then importance and advantages of the contract were discussed. Chapter two explores the legal nature of the contract, its impact in an attempt to interpret the nature of the contract to determine applied rules. The researcher distinguished between this contract and other similar contracts as lease contract, loan contract, sale lease back contract, sales on installments, and documentary credit contract. Then the researcher differentiated between lease financing contract as a complex system consists of serial traditional contracts, then the study discusses this contract as a separate one. The study concluded that it’s a new system with its own and distinguished entity from other contracts. The contract has several characteristics of other contracts, but it is different. It has certain characteristics which represent its specific nature, and entitles it to certain rules and regulations, either regarding relationship between parties (i.e regarding rights and responsibilities of the lessor and the lessee. Chapter three given a detailed discussion about the Taxation structure of the lease financing contract. The importance of tax in this contract, the need for suitable tax treatment, with exemptions, tax motives, for the encouragement of effective and good projects in this regard. The study presented tax rules applicable to this contract, and the basis for income determination which comes as a result of this contract. The study concluded with a recommendation that the Palestinian income tax should include articles to deal with this type of contract.