By definition, cross-border leasing is a leasing arrangement where lessor and lessee are situated in different countries – Because the agreement between parties involves two or more countries hence “cross-border”.
Cross-border leasing is quite prominent in Europe. Also, beyond Europe, we can see Cross-border leasing between US, Canada & Latin American countries (Mexico, Brazil, etc.).
Though “Cross-border” leasing has a much broader business strategy behind it however quite often it is associated with tax advantages and more so towards the negative aspect of tax shelters such as offshore based lease transactions from the Cayman Islands.
Here in this blog, we explore some of the more strategic factors behind asset finance lessors decision to do cross-border leasing.
Why do lessors engage in Cross-border leasing?
There might be many reasons specific to each lessor as to why they would choose to do cross-border leasing, but here we will look at some common factors based on our experience in working with European Asset Finance companies:
- Meet manufacturer/parent sales objective: A mechanism for asset/equipment manufactured in lessor’s country to expand financing business outside of the country without legal entity set up in other countries – This is mainly seen in Captive lessors.
- Meet “Strategic Vendor” objective: In vendor based financing, as a lessor to support a strategic global vendor to reach their sales and strategic objectives in reaching out to countries outside of lessor’s legal presence.
- Prospect / Customer demand: it could also be the prospect/customer (as a lessee) choice of going for a cross-border lease due to their country not being mature enough (especially in developing countries). It could either be the specialised asset or for the asset finance structural needs that they would reach out to lessors outside of their country such as Cisco Germany did a major and large cross-border financing deal in 2015 with ALBtelecom in Albania.
- Key global customer relationship: Ability for lessors in one country to maintain a key global customer account relationship with a global lessee present across different countries irrespective of lessors physical presence in those countries – This is mainly seen in big-ticket leasing such as ships or aircraft or railway rolling stock and also in a fleet.
- Tax advantages: Choosing to do cross-border leasing from certain countries such as Ireland offers significant & legitimate advantages including relatively high capital allowance rates and low withholding taxes through which lessors can offer competitive lease pricing. This is quite common with US-based lessors looking to expand in Europe setting up in Ireland as base for the whole EU market such as Dell Financial Services.
- Solution selling and services demand: Due to the nature of financing the whole solution, add-on service needs of the prospect/customer being immature in their local country. Solution selling/financing is much more than financing the asset but the whole service, insurance, maintenance mainly in case of specialised assets.
Currently, the asset finance, business models are moving into solution selling than the traditional way of financing just the asset. Digitalisation and technology maturity provide lessors with the opportunity to put the customer’s priorities at the centre of their strategies, with solutions with lesser operational difficulty that can match the speed, agility, and customer focus of other entrants and digital players
Have you encountered any other reasons for doing cross-border leasing? Leave your comment below, as in future articles we will look at some of the operational difficulties that lessors would face when doing cross-border leasing and how technology and digitisation strategy can solve some of those difficulties.
VIP Apps Consulting team has extensive experience within the leasing financial services industry with the knowledge, capabilities and operational experience, to help organisations assess and implement the required process changes.
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