1. PwC Main differences between operating leasing and pure rental* *connectedthinking Catalin Alexandru Lawyer, D&B David si Baias

2. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 2 19 October 2005 Contents  Preliminary comments  Distinction criteria between operating leasing and pure rental  Legal consequences

3. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 3 19 October 2005 Preliminary comments  Designed to satisfy similar economic needs  Similar CAEN codes  Do rules governing the rental agreement apply to operating leasing ? –Broad definition of the rental agreement in the Civil Code –Draft Civil Code –Recommended approach - separate agreements with separate rules under the legislation in force

4. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 4 19 October 2005 Distinction criteria  Title of the agreement – not binding on the court (merely indicative)  Option right  Essential element of any leasing agreement under Romanian law  Distinction between option right and the first refusal right occasionally included in rental agreements  The option right is compatible with pure rental  The lessor – always a leasing company in operating leasing

5. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 5 19 October 2005 Distinction criteria  Term of the agreement – minimum 1 year for operating leasing agreements  Scope of the agreement – restrictions for operating leasing  audio and video recordings, plays, manuscripts, patents and copyright, save for computer programmes  “durable assets” – property capable of being depreciated  Other criteria  The parties’ references to specific legal provisions  Computation of consideration

6. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 6 19 October 2005 Legal consequences Lessor’s obligations  Delivery obligation  Operating leasing – the lessor is not liable for failure to deliver – even though the law refers only to financial leasing, it also applies to operating leasing  Rental – the landlord is liable for failure to deliver  Warranties  Operating leasing – the lessor warrants the quiet use of the leased asset, provided that the lessee has observed all the clauses of the agreement

7. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 7 19 October 2005 Legal consequences Lessor’s obligations  Warranties (cont.)  Operating leasing  Is the lessor liable for hidden defects in the leased asset ?  Rental  The landlord warrants both the quiet use of the assets and their conformity  Obligation to maintain the asset fit for use  Operating leasing – not applicable (the lessee may bring a court action against the supplier)  Rental – applicable

8. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 8 19 October 2005 Lessee’s obligations  Use of the asset  Operating leasing  Use in accordance with the supplier’s instructions  Rental  Use in accordance with the purpose of the asset  Return of the asset  Operating leasing– subject to lessee’s option right  Rental – mandatory unless the landlord agrees otherwise Legal consequences

9. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 9 19 October 2005 Legal consequences Other consequences  Writ of execution  Operating leasing  Writ of execution in respect of lessee’s obligation to return the leased asset  Writ of execution for movable assets under Law No. 99/1999 (Title VI)  Writ of execution if concluded before a notary public and ascertains a receivable that is documented, determined/determinable and due for payment (less practical)  Rental  Writ of execution for movable assets under Law No. 99/1999 (Title VI)  Writ of execution if concluded before a notary public and ascertains a receivable that is documented, determined/determinable and due for payment

10. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 10 19 October 2005 Legal consequences Other consequences  Contract risk  Operating leasing – under the law, the lessee should bear the risk of loss, destruction and damage to the leased asset and continue to pay the leasing installments – inconsistent with the definition of financial leasing – should not apply to operating leasing  Rental – the tenant is no longer required to pay rent for the period following destruction of the rented asset

11. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 11 19 October 2005 Legal consequences Termination  Bankruptcy proceedings against the lessee  Operating leasing – the lessor is entitled to terminate the agreement – leasing legislation departs from the bankruptcy legislation  Rental – the landlord is not entitled to terminate the agreement – the parties may stipulate automatic termination  Failure to pay the leasing installments / rent  Operating leasing – the lessee must have failed to pay the leasing rate for at least two consecutive months  Rental – the court may assess the extent of the breach

12. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 12 19 October 2005 Legal consequences Termination  Damages in the event of termination / breach  Operating leasing – liquidated damages in the event of lessor’s failure to observe the lessee’s option right  Rental – liquidated damages where the rental agreement is terminated as a result of the tenant’s breach

13. PwC Leasing – Movable goods and means of transport * *connectedthinking Cristian Radulescu Assistant Manager, PricewaterhouseCoopers

14. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 14 19 October 2005 Current treatment: Supply of services Split of capital from interest VAT applies to capital element at the VAT rate for goods VAT does not apply to the finance element VAT is deductible Account for VAT at time of instalments EU Accession  Supply of services – main rule  May be deemed as delivery of goods  Case by case analysis of the leasing contract  VAT Standard rated  Treatment unclear and varies between countries Supply of services vs. delivery of goods

15. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 15 19 October 2005 Supply of services vs. delivery of goods in different EU countries (*) VAT treatment for leasing of means of transport

16. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 16 19 October 2005 Cross border leasing Current treatment Cross-border leasing + option to buy => importation by the beneficiary EU Accession Cross-border leasing + option to buy => 1) within the Community  Intra-Community acquisition by the leasing company  Obligation to register for VAT purposes 2) with parties outside the Community  Importation

17. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 17 19 October 2005 Place of supply Current treatment Leasing of:  movable tangible property – where the beneficiary is located  immovable property – where the property is located EU Accession New rules:  movable tangible property except means of transport – where the beneficiary is located  means of transport – where the supplier is located  immovable property – where the property is located  Use & enjoyment for leasing transactions with non-EU parties

18. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 18 19 October 2005 Place of delivery Current treatment  Transport – where the goods are when the transport begins  No transport – where the goods are put at the disposal of the client  Installation – where the installation is carried out EU Accession  Transport – where the goods are when the transport begins  No transport – where the goods are put at the disposal of the client  Installation – where the installation is carried out  Distance sales 1.where transport ends (>threshold / option) 2.Where transport begins (<threshold)  Excise goods & new means of transport– where transport ends  Second-hand scheme – MS of origin

19. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 19 19 October 2005 Compliance Current treatment  VAT return  VAT purchase ledger  VAT sales ledger EU treatment  Register of non-transfers  Recapitulative statement for intra – Community deliveries and acquisitions  A list of capital goods subject to adjustment (e.g. fixed assets)

20. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 20 19 October 2005 LOCALSUPPLIER L – LOCAL LEASING COMPANY COMPANY ROMANIANCLIENT service supply of goods ROMANIA Local Leasing – movable goods 2 operations:  Leasing – service: VAT on each installment  Financial VAT both on principal and interest;  Operational VAT on lease installment;  Local supply of goods at the end of the leasing contract (if option exercised) VAT on residual value. NEW

21. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 21 19 October 2005 supply of goods RO EUSUPPLIER L – LEASING COMPANY COMPANY CLIENT service HU ICD ICA Delivery 3 operations:  Intracommunity acquisition (ICA) in RO / VAT R/C;  Leasing - service: VAT on each installment  Local supply at the end of the contract (if option exercised) VAT on residual value. NEW Local Leasing – movable goods

22. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 22 19 October 2005 RO FOREIGNSUPPLIERS (outside EU) L – LEASING COMPANY COMPANY CLIENT service supply of goods TR exportimport Local Leasing – movable goods 3 operations:  Import by L Import duties (import VAT, customs duties) at the moment of import  Leasing - service: VAT on each installment  Local supply at the end of the contract (if option exercised) VAT on residual value.

23. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 23 19 October 2005 ROMANIANCLIENT L – LEASING COMPANY COMPANY RO EU SUPPLIER service supply of goods HU L’ 3 operations:  Leasing - service (except MS where leasing = supply of goods!) always VAT of country of origin (HU) VAT registered person refund on 8th Directive, subject to limitation in the Client country of origin Non-registered person no refund If option exercised:  Intracommunity acquisition (ICA) in RO by L / VAT R/C L registration in RO (L’)  Local supply (no transport) NEW Cross Border Leasing – Means of transport

24. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 24 19 October 2005 3 operations:  Leasing - service (except for MS where leasing = supply of goods!); VAT in RO if Romanian client is a taxable person R/C if Romanian client is a VAT registered person If option exercised:  Intracommunity acquisition (ICA) in RO by L / VAT R/C - L registration in RO  Local supply (no transport) L – LEASING COMPANY COMPANY service MOVABLE GOODS (except for means of transport) of transport) ROMANIANCLIENT supply of goods ROHU L’ NEW Cross Border Leasing – Means of transport

25. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 25 19 October 2005 3 operations:  Import performed by L L registration in RO by FR  Leasing service Always VAT in RO  Local supply of goods (no transport) L – LEASING COMPANY COMPANY RO MEANS OF TRANSPORT ROMANIANCLIENT service supply of goods TR L’ NEW Cross Border Leasing – Means of transport

26. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 26 19 October 2005 service L – LEASING COMPANY COMPANY MOVABLE GOODS (except for means of transport) of transport) ROMANIANCLIENT supply of goods ROTR L’ NEW Cross Border Leasing – Means of transport excepts means of transport 3 operations:  Import performed by L L registration in RO by FR  Leasing service VAT in RO if Romanian client is a taxable person R/C if Romanian client is a VAT registered person  Local supply of goods (no transport) NEW

27. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 27 19 October 2005 PricewaterhouseCoopers services  Training  Pre-accession review (tailored training included)  Pre-accession Forum

28. Main differences between operating leasing and pure rental PricewaterhouseCoopers D&B David si Baias Slide 28 19 October 2005 Your worldsOur people © 2005 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers. PwC