UNITED STATES TAX-BASED CROSS-BORDER LEASING

by Philip H. Spector, partner, Watson Farley & Williams

The U.S. tax-based leasing industry is active in the financing of ships and other big-ticket assets. Until recently, ships have not been a favored asset due to the long tax depreciation period for vessels and the “Pickle” rule, which stretches the tax depreciation period even longer when foreign lessees are involved. However, those limitations apply to sale-leaseback structures. Over the last two years, new structures have emerged that are not subject to these limitations. Many vessel owners have exploited the U.S. leasing market.

Basic U.S. Cross-Border Leasing Models
U.S. tax-based leasing involves two basic models. In the “asset model”, the U.S. equity investor purchases the asset from and leases the asset back to the foreign owner. The depreciation tax benefits available to U.S. owners of assets leased to foreign lessees were reduced in 1984 with the so-called “Pickle” rules. The deductions are limited to straight-line over the longer of (i) the asset’s “class life” (18 years in the case of a vessel) or (ii) 125% of the lease term. These rules made leasing of ships uneconomic. A Clinton Administration budget proposal would change the rule to straight-line over 150% of the class life, but this would not help matters much.

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