201309 Wcg Finland Auto and Asset Finance Country Survey

8/14/2019 201309 Wcg Finland Auto and Asset Finance Country Survey

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ASSET FINANCE INTERNATIONALIN ASSOCIATION WITHWHITE CLARKE GROUP

White Clarke GroupFinland Asset and Auto FinanceCountry Survey


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FINLAND ASSET ANDAUTO FINANCE SURVEY

Introduction

Finland, like many of the worlds most advanced economies, is currentlyundergoing a series of challenges in the form of diminishing exports, lacklustreconsumer demand, rising jobless gures and government-mandated scaltightening.

Though a small country - Finland has a population of around 5.4 million - itseconomy is highly advanced. It has a strong nancial sector supported by Nordicbank groups that have managed to avoid the more serious problems that hitbanks elsewhere especially in Western Europe during the nancial crisis.

Of signicance, Finland is alone in the Nordic region in being a member of theeurozone, and this has been felt through restrictions on state spending, while ata corporate level it has benetted from a lower cost of capital courtesy of anaccommodative monetary policy directed by the European Central Bank.

Yet Finland also stands alone in the positive fact that credit rating agencies seeits credit as being of the very highest quality, and so can boast a triple-Asovereign rating with a stable outlook.

Bigger economic problems in Europe have not been particular kind to Finlandsauto and asset nance industries, as largely expected. Though against this, themarket has experienced growth of around 5% in the last twelve months in termsof overall loan portfolios of leasing members of the Federation of FinnishFinancial Services.

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Many asset nance companies continue to see tougher market conditions in theform of lower demand for capital corporates are being that much morecautious before they commit to funding new equipment, while also slower todecide on car eet acquisitions at least until the economic picture is a bit clearer.But a number of IT leasing specialists continue to see net growth in the take-upof the latest office and home technology like laptops, mobile devices, andprinters. This has boosted the balance sheets of small-ticket lessors, while theleasing of larger-ticket items is pending a more conducive economicenvironment.

The consensus is that the leasing market will see growth of up to 5% in 2013,though quite a few lessors temper this with a attish scenario within somesectors such as plant, machinery and vehicles. The advent of super trucks(because of changes to maximum weight regulation) could improve margins,some equipment nance companies suggest, though this is uncertain at themoment.

In terms of new spending on machinery and equipment, Finnish companiesspend around one in every 10 euros via a lease nance route. The remainingows are typically directed through hire purchase schemes or buying outrightthrough traditional bank loans. One upside in recent periods has been theinterest from small and medium-sized enterprises (SME) in using leasing,particularly in technology.

Therefore, the huge potential for what are mostly bank-owned lessors to attractmarket ows is very evident and provides hope for this niche market.

About this survey

This country survey aims to provide a balanced view of the equipment nanceand auto leasing market in Finland. The survey covers the following areas:

A summary of leasing activity in Finland;

The current economic climate and the incentives for and constraints on doingbusiness in Finland;

Key comment from senior industry gures on the outlook, challenges andopportunities;

The latest developments in taxation and how these reforms affect leasing;

And

The basic requirements regarding accounting for leases.

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The Leasing Industry in FinlandBackground

Like all leasing markets, leasing as a method of asset nance competes withother types of funding, such as bank nance, for market share. According to theFederation of Finnish Financial Services (FFFS) this amounted to around 10% of total investment in machinery and equipment volumes in 2012.

In Finland, asset nance companies owned by bigger nancial services groups,like Nordea Finance, continue to dominate the domestic leasing market with a70% market share as at the end of 2012.

Other providers accounting for a third of total market share are owned byequipment manufacturers, IT companies and car makers.

While Finland does not have its own specialist asset nance association, theinterests of major leasing companies are represented by FFFS which alsocovers nancial services rms in the country. There is also no separate vehiclenance association.

Interestingly, all the members of the FFFS engaged in asset nance activities atotal of just ve lessors as at August 2013 are banks or nancial group-owned

entities.According to the FFFS leasing members, computers and business machines suchas printers/scanners (26%) were the most leased types of equipment in terms of net contracts, an increase of over 4% in market share since 2011.

Automobiles (22.4%), machinery and industry equipment (16%), and roadtransport vehicles excluding automobiles, (14%) are the next most popular leasedassets as at end of 2012.

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Hire purchases Leasing Car leasing Investment nancing Factoring

2004 2005 2006 2007 2008 2009 2010 2011 2012

4000

3500

3000

2500

2000

1500

1000

500

0

Outstanding credits (member nance houses only) m

Source: Federation of Finnish Financial Services (FFFS) as at 31/12/2012


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Regulatory issues

Though there is no dedicated legislation relating to leasing in Finland, with mostasset nance companies content that the market has, generally, functioned wellwithout the need, there have been cases where it might have been benecial.

During 2012 and into this year, the FFFS has noted cases where some kind of legal denition would have been needed and helpful for leasing to be seen as

simply a means of nancing an investment just like a standard bank loan orhire-purchase agreement. However, so far there have been no plans to introducespecial leasing legislation but this may change in the future.

From a legal perspective, there are three types of nance companies in Finland.

Firstly, most bank-owned nance companies (by denition these are members of the FFFS) maintain a credit institution licence, which grants access to thenancial product market. These companies are also subject to specic legislationin the form of the Credit Institution Act. They are also, importantly, under thesupervision of the Finnish Supervision Authority (Finanssivalvonta). Firmsoperating under the Credit Institution Act are also mandated to meet capitaladequacy, liquidity, and risk management conditions.

The second type of nance company operating in Finland is the nancebusinesses of manufacturers of equipment like automobiles or printers, forexample. These companies do not have a licence for their leasing operations andare not supervised by the FSA.

The third type of nance company, in this context, is the branch of a foreignnance company based in the European Union (EU), many of which have beenestablished in Finland in recent periods. These overseas branches do not need alicense to operate a leasing business because they are operating under EU law.

In terms of various tax rates which may impact the asset nance industry, thecorporate tax rate, currently at 24.5% but will be reduced to 20% from thebeginning of 2014, is the most important.

Value Added Tax (VAT) came into force in 1994 and is currently at 24%. Since1999, there has been a maximum tax depreciation of equipment and machineryrate of 25% per annum.

At the start of 2013, the Finnish government also introduced a new taxapplicable on all deposit-taking banks which accounts to an annual levy of 0.125% of the risk-weighted asset.

For more on this topic, please refer to the later section in this survey, Leasing inFinland potential tax traps and benets for entrepreneurs.

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2012 industry highlights

Though the industry and economy in Finland continue to faceuncertainties linked to the euro sovereign crisis, falling exportdemand, and general scal tightening imposed by thegovernment, demand for asset nance has largely continued in2012. The overall loan portfolios of asset nance companiesbelonging to the FFFS rose by around 5% compared to 2011slevel.

New lending increased within IT and office equipment leasing (by12% compared to 2011). However, leasing machinery andindustrial equipment dropped as a result of companies being morecautious with regards capital equipment investment against abackdrop of worsening economic conditions.

Staff levels within Finlands leasing industry continue to besqueezed and are down by 25% since 1993.

Around 800 employees were working in the industry as at end of 2012, according to the FFFS based on its member companies.Compare this to around 975 employees hired in 2008 and pre-nancial crisis, or the 1060 or so working in the leasing industry in1993 two decades ago.

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Commentary

Reima Letto, secretary general and special adviser at the FFFS

The secretary general and special adviser at the FFFS, Reima Letto, commentedon the gures to Asset Finance International:

During the last few years, it is fair to say that leasing has accounted for below10% of all investment in machinery and equipment in Finland. One reason forthis low gure is the popularity of business hire purchase, also known asinvestment nancing. When taking into account the gures of hire purchase, thepenetration rate in Finland was actually around 16.8% in 2012 animprovement on the European average of 14.6% for 2012.

Hire purchase is comparable to leasing to help nance machinery purchases, orthe acquisition of cars and other vehicles like trucks and trailers. While it isgenerally used because the company wants to have ownership of the asset afterthe nancing period, one of the main reasons for its relative popularity ahead of leasing in Finland is the taxation implications.

If we drill down into FFFS member companies, the total value of outstandingleased assets excluding property for 2012, was 4708m and +2.6% on 2011.Leasing as a share of their credit portfolios is around a third. Business hirepurchase accounted for around 1853m of total value of outstanding leasedassets and consumer hire purchase accounted for about 1825m, as at end of 2012. As a share of FFFS member companies credit portfolios, hire purchase both business and consumer-use accounts for 13-14%, as at end 2012.

Looking ahead, it goes without saying that asset nance companies willcontinue to operate in a challenging environment in Finland. Generally, theoutlook for Finnish companies is one of caution, and this, by implication, meansmodest growth within their investment intentions and therefore the potential forleasing.

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Sector analysis

With respect to outstanding credits by type, leasing accounts for nearly a third of the total market share of FFFS member nance companies, as at the end of 2012.

What type of equipment is getting leased? The chart below reveals that for FFFSmembers that provide leasing solutions, so-called big-ticket items like trucks andheavy machinery are no longer the key assets for new leasing deals with officeequipment like laptops and printers in vogue in recent months.

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Consumer credits 18.6% (-0.5) Hire purchase 13.4% (+0.3)

Investment nancing 13.2% (-1.0)

Factoring 13.0% (+0.8)

Loans 7.8% (+1.2)

Real estate leasing 2.8% (+0.1)

Leasing 31.2% (-0.9)

Source: FFFS 31/12/12


Machinery and industrial equipment 16.0% (-4.2)

Computers and other

business machines 26.9% (+4.3)Road transport vehicles 14.0% (+0.6)

Passenger cars 22.4% (-2.9)

Other 20.7% (+2.2)


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With respect to new business by credit type, leasing has remained generally aton 2011, while volumes for auto leasing have fallen by around 14% as corporatescut back on eet requirements as a way of managing costs during challengingtimes.

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Hire purchases Leasing Car leasing Investment nancing

1600

1400

1200

1000

800

600

400

200

0

New business by credit type (m)

+6,3%

-0,3%

+14,4%

-2,7%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



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Economic Overview

Finland, one of only a handful of economies in the eurozone rated triple-A, is ahighly industrialized free-market economy and ranked 41st in the world bygross domestic product (GDP) as at 2012 (in US dollars terms source: WorldBank). It has a per capita output of the same level as that of Austria, Belgium,the Netherlands, and Sweden, and exports, like paper and pulp, account forover one third of gross domestic product in recent years. It also has excelledin high-tech exports like mobile phones in recent times.

However, similar to other eurozone economies since 2009, the Finnisheconomy has entered a downward trend, with, according to the OECD, lowcapacity utilization and uncertainty about future demand depressing businessinvestment. Generally, rising unemployment and recent tax increases havealso weakened consumption.

As recently as August 2013, industry observers noted sluggishness in exportsbeing held back by the eurozones prolonged weakness. In turn, this haseroded competitiveness, while unemployment has edged up thougheconomists forecast this to stabilize in 2014 (though unlikely to fall),concurrent with an improving economic climate more generally across Europe.

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GDP growth in Finland compared to Austria and the Nordic region: 2003-2014

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f

10

8

6

4

2

0

-2

-4

-6

-8

-10

IcelandSwedenFinlandNorwayAustriaDenmark

Source: World Economic Outlook Database, 2013


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When the Finance Ministry of Finland (Valtiovarainministeri) announced at theend of June that GDP would shrink to 0.4% in 2013 instead of growing 0.4%as forecast in March few observers were especially surprised that thefortunes of the Nordic economy had dipped. The forecast for growth for 2014was also cut, from 1.6% to 1.2%, though slightly better than predictions fromthe IMF for next year (1.1%).

While Finland can be proud of its coveted triple-A credit rating, the slip into

recession at the start of 2013 as weak European demand hit exports wasntsolely caused by the eurozone's long-running debt crisis alone, according tothe Finnish government. It noted in a statement that among many traditionalindustries there had been a struggle to respond to globalization andtechnological change.

The government has also pointed to weak consumer condence anddifficulties in cutting the scal decit as two important drivers of thedownturn. It did, however, underline job reforms and efficiencies in the publicsector as potentially bolstering longer-term scal sustainability next year andbeyond.

Erkki Liikanen, Governor of the Bank of Finland, the countrys central bankand national monetary authority, gave a speech late spring 2013 anddescribed what he believed were the forces behind the recent economiccontraction: The Finnish economy has faced two major changes at the sametime: the restructuring of Finnish industry and the recession in the wake of the nancial crisis.

The central banks forecast for unemployment (8.4% in 2014) is unlikely tofall signicantly the year after, said the Governor, while he also echoed the

views of many bank leaders in Europe when he talked of youthunemployment as a worrying trend: It is vital to avoid a situation in whichsome young people could become permanently excluded from the labourmarket, he added.

Governor Liikanen went on to stress what he saw as Finlands strengths whichshould help the economy climb of out of its latest low. Finlands strength liesin strong basic education, a knowledgeable workforce, a functioninginfrastructure and reliable organs of administration and justice. A sustainableimprovement in the economy and employment will, however, requireenhanced international competitiveness, structural reforms to boost thepotential output of the economy and successful innovation policies.

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86

4

2

0

-2

-4

-6

-8

-102004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: World Economic Outlook Database, 2013

GDP growth in Finland over last decade in % terms


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Exports

Finland has strong and competitive manufacturing sectors, with the wood,metals, engineering, telecommunications, and electronics industriesexcelling. Since the 1990s, Finland has also become well-known for its high-tech exports like mobile phones and the global brand, Nokia, though its shareof total exports has declined in recent years.

Except for timber and several minerals, Finland depends on imports of rawmaterials, energy, and some components for manufactured goods. The Finnishclimate means agricultural development is limited to maintaining self-sufficiency in basic products. Forestry, an important export earner, provides asecondary occupation for the rural population.

Small and medium-sized enterprises (SME) in Finland

An important driver of the leasing market in Finland is the small and medium-sized enterprise (SME) sector. Typically, the more active SMEs are in terms of raising funding levels, leasing equipment, servicing or, having serviced,existing equipment, the greater the level of interaction from asset nancecompanies. There is huge potential in this respect, suggest many leasingcompanies.

In Finland, nearly a third of employment in the SME sector is within the high-tech industries. According to a European Commission study for 2012, Finlandboasted around 210,000 different SMEs employing over 870,000 workers andgenerating total value add of around 50bn.

Impressively, according to the EC report, Finland boasted one of best SME

proles of all EU-27 countries with a top performance in four out of 10 policyareas, including securing access to nance.

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4.5

4.0

3.5

3.0

2.52.0

1.5

1.0

0.5

0.02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ination rate % change since 2004, estimates for 2013-14


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SME nance

While SMEs in many other EU countries struggle to obtain nance, especiallyin the form of bank loans, Finlands SMEs appear to be largely unaffected bysuch problems, says the EU. In terms of access to credit, Finland continues toscore well on all indicators except for the relative difference in interest ratelevels between loans above 1m and loans below that threshold.

Finland performs best on the willingness of banks to provide loans: only 1%of SMEs reported a deterioration in banks attitudes in this regard, the bestscore of all EU Member States.

Finland has also made inroads as regards the cost of credit for small rms(SME-sized credits). The mark-up last year (2011) for smaller loans was higherin Finland than in the EU as a whole (30% compared to 24 %); this year, themark-up fell to 19%, which is practically on par with the EU average.

Payment delays remained relatively short only 23 days compared to theEU average of 53 days and so did payment losses only 1.9 % of totalturnover (EU: 2.9%). Both factors had a positive effect on the cash-owsituation of SMEs, suggested the EU report.

Access to venture capital is also above average, while the indicatorsdescribing the basic regulatory characteristics of the nancial market, suchas the legal rights of creditors and depth of credit information, show a moremixed and rather average picture overall.

A number of policy measures have been taken recently to improve thesituation in this policy area in Finland. In February 2011, the Finnishgovernment and the Export Credit Agency decided to award 700m ininvestment loans for 2011. The nancial problems of SMEs in particular arelarger than before the economic recession, so this type of nancing isneeded as a complement to the nancial markets.

New conditions for nancing rms due to economic recession wereintroduced in February 2011. On 3 February 2011, the public-owned credit

agency (Finnvera) extended the maximum loan time from six to 10 years,improving the nancing prospects for SMEs in particular.

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Competitiveness

As might be expected from a highly developed, organized and modern free-market economy, with a strong tradition of entrepreneurship, Finland ranksvery highly for engendering an environment where doing business iscomparatively straightforward.

Finland ranks 11th out of 185 countries in the Doing Business 2013 survey

produced by the World Bank. Though this is one notch down from 2012, whenthe country boasted a top ten position, it nevertheless puts it in the leadingpack and ahead of Germany, France, and Sweden. The higher the ranking, themore conducive the regulatory environment is to operating a business,including paying taxes, trading across borders, and within the context of theasset nance, getting credit.

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How Finland and comparator economies rank on the ease of doing business

Denmark

Norway

Finland

Sweden

Iceland

Germany

Regional Average

France

1 185

Ease of doing business rankingSource: Doing business database

5

6

11

13

14

26

29

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Within the context of the report and perhaps against common-thinking, itcomes as a surprise that Finland ranks 40th from 185 countries in terms of getting credit behind the likes of Denmark and Germany, but level withIceland and Sweden. Finland remains strong in areas such trading cross-border, enforcing contracts and resolving insolvency issues, but weaker onprotecting investors and starting a business.

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Starting a business 49)

Dealing with construction permits 34)

Getting electricity 21)

Registering property 24)

Getting credit 40)

Protecting investors 70)

Paying taxes 23)

Trading across borders 6)

Enforcing contracts 9)

Resolving insolvency 5)

How Finland ranks on Doing Business topics

How Finland and comparator economies rank on the ease of getting credit

Germany

Denmark

Sweden

Iceland

Finland

Regional average

France

Norway

1 185

Ease of doing business rankingSource: Doing business database

23

23

40

40

40

43

53

70


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Competitiveness

One useful benchmark for looking at the level of competitiveness within aneconomy is the World Economic Forums Global Competitiveness Report,which puts Finland 3rd out of 144 countries in terms of drivers behindproductivity and pillars of competitiveness. In fact, Finland is ranked rst inareas such as education and training, while in the top ten in terms of innovation and business development, and nancial market development.

Weak points include macroeconomy and size of market versus competitors, asexpected.

Within nancial market development, the report concluded Finland wasstrong in areas like ease of access to loans and affordability of nancialservices.

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The Global Competitiveness IndexRank Score(out of 144) (1-7)

GCI 2012-2013 3 5.5GCI 2011-2012 (out of 142) 4 5.5GCI 2010-2011 (out of 139) 7 5.4

Basic requirements (20.0%) 4 6.0Institutions 3 6.0Infrastructure 23 5.6Macroeconomic environment 24 5.7Health and primary education 1 6.8

Efficiency enhancers (50.0%) 9 5.3Higher education and training 1 6.2Goods market efficiency 18 5.1Labour efficiency 15 5.0Financial market development 4 5.5Technological readiness 10 5.9

Market size 54 4.2

Innovation and sophistication factors (30.0%) 3 5.6Business sophistication 7 5.5Innovation 2 5.8

Source: World Economic Forums Global Competitiveness Report 2012-13.


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You mention the potential for increased demand for leasing rather thancomplete ownership from some sectors in the future, does Finland havea culture of asset ownership which could act against the leasing marketin this respect?

There is a tradition of ownership in Finland, yes, and certainly at a culturallevel. This is especially true in the auto sector. While corporates do run eets,the level of consumer car leasing is not as prevalent, but leaves signicant

room for growth, in my view. Current tax rules also favour higher purchaserather than leasing for corporates.

One area where some lessors have been successful is the small ticket market,so the likes of laptops, computers, printers and office equipment generally.This is a competitive marketplace with a number of small ticket IT leasingrms especially active. On the ipside, customers can get attractive offers andusually at a competitive price.

In the small ticket area, many providers also offer a solutions-based packageespecially in the IT and office equipment space. This can involve providingnance for equipment, while helping to maintain it through its lifecycle.

Will the prospect of super-trucks on Finlands roads, help to driveleasing volumes in the light of maximum tonnage changes thissummer?

Interesting question. Yes, this summer we saw regulation in Finland lift themaximum weight restrictions of trucks from 60 tonnes to a potential 76tonnes maximum. We think this could benet the forestry and paper marketsthat typically use large-sized truck/trailer combinations to move timber. Newrules may mean a greater demand for super-truck leasing in the long-run andit is certainly a window of opportunity for the local leasing community.

Nordea Finance is an active member of the FFFS (Kiviniemi was vice-chairman in 2011), though with only ve members that operate in theleasing market, how easy is it to get your voice heard at a governmentlevel?

We have had some success this year in communicating our views andconcerns. We are a small club but a close and effective one. There has beengood co-operation in the lobbying of the Finnish parliament and weve hadvisibility during 2013 in the press and media. We want to get the messageacross that leasing is a good nancial alternative during challenging andscarce economic times just as it is in better days. We also believe the SMEcommunity needs more support in nding alternative funding solutions tobank-only loans, for instance.

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We are in an economic environment that creates problems andopportunities, claim major lessors. Do you agree?

The economic environment in Finland continues to depress market sentiment,with growth down, unemployment up, and the level of investment bycompanies in plant and machinery at. Undoubtedly, the wider economictroubles in the eurozone and domestically are inuencing demand for assetnance, and many leasing companies in Finland expect this trend to continue

into next year.For instance, Lauri Mantere, country sales manager for De Lage LandenFinland, noted how the countrys economy driven by exports in the main is dependent on the performance of the global economy and especially itscore export countries. While this has trickled down into sentiment, there isstill capacity for nance solutions and leasing as relative costs of fundingare low.

As one of the few euro countries with a triple-A rating, this among otherthings means that the public sector has access to cheaper funding and thatfunding in general is still available at a reasonable cost for majority of theplayers in the local marketplace. Lauri Mantere, country sales manager, DeLage Landen Finland.

As a result of tougher conditions but potentially more competitive means of funding, the De Lage Landen chief says his company has leveraged its globaland European vendor relationships to maximize sales, and diversied itsproduct offering within Finland.

Lauri Mantere, country sales manager, De Lage Landen Finland

Another key player in the regions equipment vendor sector space is SiemensFinance Services Finland. According to its general manager, Toni Hllfast,important decision times for larger investments are currently protracted in thecurrent environment, especially as GDP has weakened and capital expenditurelevels have dropped off by 2% (2012) forecasts beyond this year show anincrease of around 2%.

In this regard, Hllfast does expect some gains in the leasing market as aresult of a general upturn in spending from companies on capital equipment.

He said: There are opportunities for leasing companies in Finland to continueto play an important role in supporting much needed investment inequipment in certain sectors such as healthcare, energy and transportation albeit in a slow growth environment.

Frank Verver, general manager of the Nordic region at Arval, notes that assetnance companies are impacted directly by the economic conditions andthis has induced a cautious approach by many lessees thinking aboutpotentially using equipment nance.

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Petteri Pihlas, managing director of LeasePlan Finland

Petteri Pihlas, managing director of LeasePlan Finland, offers an interestingview on the state of economy and the immediate effect of tighter scalconditions, from the position of an auto eet group. While he acknowledges,on-going restructurings and cost cutting programmes in several companies(because of the economic downturn) are reducing eet sizes per customer, atthe same time, various eet management-related tasks are more oftenoutsourced to leasing companies.

He stressed: An increasing number of companies currently owning their eet

are considering leasing and eet management services as an option todecrease costs, release capital tied up in cars and to outsource risks related tothem. Therefore, the economic downturn has both a decreasing and increasingimpact on the demand for services provided by leasing and eet managementcompanies.

While Frank Verver, of eet operator Arval, believes one of main challengesfor auto nance and leasing generally, is to be able to continuouslydemonstrate the added value of leasing, rather than other possible solutionsand be able to deliver products relevant to clients changing demands.

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Siemens Finance Services Toni Hllfast

Siemens Finance Services Toni Hllfast noted his own company seeing anincrease in leasing penetration compared to traditional bank loans.Customers are considering alternative exible solutions to nance theirinvestments, he said. He also noted there is also increasing demand in boththe public and private sector to incorporate various managed services into theoverall lease nancing agreement so that the customer signs just oneagreement with their supplier.

Windows of opportunities if you look hard enough top lessors

Most leasing rms in Finland acknowledge that difficulties in the economy(lower investment, poor sentiment) has impacted the market though hasprovided some opportunities in the form of competitively-priced offers andextended services agreements. But where do lessors think are the pockets of opportunities to grow leasing penetration, raise volumes, and hopefullyincrease the size of the market relative to bank funding solutions in 2013 andbeyond?

Anna Lepp, global PR & marketing manager, White Clarke Group said Thepotential for Finnish businesses to grow, through expanding their capitalspending requirements is clear for everyone to see. In this context, thedomestic auto and asset nance industries, while starting from a low base,have the opportunity to meet the needs of those companies thirsty for eetnance and equipment funding, with exible and affordable solutions.

Anna Lepp, global PR & marketing manager, White Clarke Group.

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Pertti Kiviniemi, managing director and CEO of Nordea Finance Finland, islooking to Finlands local government and the public sector more generally(hospital, energy, electricity) as providing a possible source of new business.This, he argues, is because penetration rates are low in this area despite ademand for new and specialist equipment and where the customer doesntnecessarily want ownership rates despite the culture of [asset] ownership]in Finland.

Arvals Frank Verver believes one of the key drivers of opportunity andpotential business revenues for Finlands asset nance industry, could be thegrowth of outsourcing by companies of non-core activities especially wherefull service leasing is a perfect match. He also reckons the SME market inFinland, has become a very interesting segment for leasing companies asthis is denitely the area where protable growth is observed.

Potential of green leasing

As the Nordea boss has mentioned, the advent of super trucks on Finlandsroads and motorways (thanks to a change to maximum tonnage restrictions)could potentially boost the big ticket leasing market. But another opportunity

in the form of lease nancing more environmentally-friendlier vehicles, likeelectric cars, could be a different market for some lessors to approach in2013-14.

Certainly vehicle taxation [in Finland] is linked to CO2-emissions and alsoresidual value setting supports environment-friendlier vehicles, and so whilethe electric vehicle segment is still very small due to pricing and technicallimitations, its growing with more developed technology. Photovoltaic (solar)equipment, on other hand, is difficult from a collateral point of view, but isanother growth area though cant easily be nanced. - Pertti Kiviniemi,managing director and CEO of Nordea Finance Finland.

3 Steps Artti Aurasmaa also nds scope for so-called green leasing ascompanies continue to consider the environment impact of using moreenergy-efficient equipment and via a lease nance route. Though during thelast couple of years, environmental considerations have had less of an impacton asset purchasing decisions (due to the economic downturn), we areexpecting its importance increase further as the economy improves, headded.

LeasePlans Petteri Pihlas echoes the view of Nordeas Kiviniemi in that theelectric vehicle market from a leasing viewpoint does carry some potential,but the supply is just not there yetWe are still waiting for models in thevolume segments with the same usability as the combustion engine and witha competitive price, he said.

At De Lage Landen Finland, the green market, especially energy efficient

technology, is an important growth area, according to country sales manager,Lauri Mantere. We see this as a real win-win area, as this can bring newbusiness and also supplement our efforts to create a more sustainableenvironment for future generations, he believes.

Arvals Frank Verver calls on more involvement from the Finnish governmentin the area of energy efficient solutions. The green market is promoted bycomparatively low taxation on vehicles with low CO2 emissions and otherEuropean markets have better incentives than in Finland in this regard. Thegrowth depends on scal incentives, but so far it is not highly promoted bythe government, he believes.

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Tax changes and the Finnish leasing market

Any changes to the tax and accounting environment for asset nanceproviders always have the propensity to create challenges and opportunitiesin equal measure, and this rule can be applied to Finland just like otherdeveloped leasing markets.

For example, Siemens Finance Services Toni Hllfast argues that the decision

by the Finnish government in March 2013 to decrease corporate taxes fromthe current level of 24.5% to 20% (commencing in 2014), could reduce thenumber of tax-driven leases for large investments. While on-going changesin the way leasing is to be accounted (via changes to accounting underInternational Financial Reporting Standards - IFRS), has led to uncertainty,says Hllfast, and has prompted some large customers who have traditionallyused operating leases to consider using their existing credit facilities, untilthere is more clarity under the awaited IFRS accounting changes.

Nordea Finances Pertti Kiviniemi also acknowledged uncertainty for leasing.

LeasePlans Petteri Pihlas believes predictability of the taxlegislation/regulation system, with long lead times if there are any changes,is vital from asset nance companies point of view. Even more important

that the actual level and/or content of them, he adds. While the basicrationale for leasing (improved cash ow, lightened balance sheet comparedto owning, outsourcing managerial tasks and risks related to assets) willremain even after the accounting changes.

Growth coupled with market differentiation not impossible believe keylessors

It has become more difficult for the leasing industry in Finland to growbusiness volumes and penetration in recent years because of the harsheconomic environment at home and across the eurozone. But many of seniorleasing executives are condent of modest growth rates (up to 5% on theyear) across a number of leased assets.

Industry association, FFFS, might be downplaying signicant growth for itsmembers, and rightly so given the tough economic backdrop, however itssecretary general, Reima Letto, notes: Leasing [in Finland] seems tocontinuously increase its penetration against challenging conditions. Theoverall loan portfolios of FFFS member nance houses in 2012 increased 5%ahead of 2011s level.

Reima Letto, secretary general, FFFS

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But growth rates of 5%, or thereabouts, appears to be what the majority of Finlands leasing chiefs think is a reasonable increase in terms of corporateusage over the coming year, with no market segment expected to shine morethan any other.

3 Step ITs Artti Aurasmaa suggests the small and medium-sized enterprise(SME) market could be the spark needed for small ticket leasing specialistsmostly in office and IT sectors, while at LeasePlan Finland, its CEO, Petteri

Pihlas, believes larger companies demand for company car eets as costcutting pressures mount could be a one to watch in the future. In thisregard, he expects that leasing volumes from midsized companies demandcould rise by around 5% in 2014.

Picking up on the IT leasing theme, Aurasmaa forecasts possible growth ratesof 10% in 2014 if the opportunities related to mobile devices are fullyutilised.

He stressed: We see signicant growth potential in IT due to increasedmobility and the needed investments to both sides of the cloud: mobiledevices and datacentres. In addition the fact that Microsoft XP support willend next April will boost the investments to PC environments during the nextnine months.

De Lage Landens Lauri Mantere takes a broader view, believing the growth of leasing rates in Finland is naturally dependant on the developments in theglobal economy. Success of the electronics industry (mainly Nokia and itssubcontractors) and Finnish pulp & paper and metal industries will have a bigimpact to the investment appetite and an impact on leasing as well.

Arvals Frank Verver suggests that the metal, chemical and transport marketswill perform better going forward, hopefully in response to the growingdemand from manufacturing more generally for related materials andcomponents.

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Tax and accounting for leasing in FinlandBy Antti Leppnen, Tax Partner, Financial Services, KPMG Finland, and AnnaKallunki, Tax Advisor, Indirect Tax, KPMG Finland.

Finnish GAAP

The Finnish Accounting Act (30.12.1997/1336) does not make any distinctionbetween an operating lease and a nance lease and does not provide any

specic provisions regarding sale and leaseback arrangements. Thus, theconcept of economic ownership is not recognized and all leases are accountedfor applying similar principles as required for operating leases under IAS 17 forboth lessors and lessees.

Lessee accounting

With respect to operating leases, and also nance leases if IFRS is not applied,the lessee does not record the leased equipment as an asset in its balancesheet and does not compute depreciation on the asset. The rental payments arerecorded as expense under accrual principles.

Disclosure is made of the amount of future lease payments, which are notshown on the balance sheet of the lessee. Material terms of the leaseagreements should also be disclosed.

Lessor accounting

With respect to operating leases and also nance leases if IFRS is not applied,the lessor records the leased equipment as an asset in its balance sheet andcomputes depreciation on the asset. The rental payments are recorded asincome under accrual principles.

IFRS

In Finland a reporting entity shall prepare its consolidated accounts inaccordance with International Financial Reporting Standards if securities issuedby the reporting entity are traded publicly as referred to in the Securities MarketAct or admitted to trading on a regulated market in a Stock Exchange operatingunder the legislation of any European Economic Area member state.

Any reporting entity is also permitted to prepare its nancial statements orconsolidated nancial statements in accordance with International FinancialReporting Standards if it has appointed an auditor that has a qualication asreferred in the Auditing Act.

IFRS makes a distinction between an operating lease and a nance lease. Inaddition, sale and leaseback arrangements are also recognized. Under IFRS,therefore, the concept of economic ownership is recognized.

According to IFRS, where a reporting entity has entered into a rental contractthat transfers substantially all the risks and rewards of ownership to the lesseeat the time of entering into the nance lease contract, the lessor presents theasset in the consolidated accounts as if the asset had been sold, and the lessee,as if it has been acquired.

Examples and indicators of situations that individually or in combination wouldnormally lead to a lease being classied as a nance lease are dened in IAS17, paragraphs 10 and 11.

If a company applies IFRS to consolidated accounts and the Finnish AccountingAct in single company accounts, the different accounting treatments may createtemporary differences in corporate taxation, which is based on single companyaccounts. Thus, a need to account for deferred tax may arise.

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Direct Taxation

Rate of taxation

In 2013, corporate entities are subject to corporate income tax at a at rate of 24.5%. The government has announced a reduction of the corporate incometax rate to 20% as from 2014.

Taxation of lessor - Corporates

Operating leases and nance leases are both commonly used in Finland andthere is no particular law with respect to leasing. The basic rule in Finnishlease taxation is that the legal owner of the relevant property can claim thedepreciation allowances. A lease contract can be considered a hire purchase if the evident purpose of the leasing agreement, from the beginning, is totransfer the ownership to the lessee at the end of the lease period. Therefore,an obligation to buy the lease object at the end of the lease period willchange the agreement into a hire purchase agreement, regardless of what theagreement is called. In such a case the legal title to the "leased" equipmentwould be regarded as being transferred at the conclusion of the agreement.

Leasing payments, which are received or receivable, are considered as incomeon accrual basis during the scal year. Advance payments which consist of payments for at least two tax years following the year when the income isreceived shall, if the taxpayer so wishes be spread over the years which theyare considered to be connected with, but may not be spread for more than 10years. The leased object is usually treated as a xed asset of a lessor and itshall be depreciated in the normal way. Interest incurred in nancing assets tobe leased is deductible as a normal business expense.

If the lease contract is regarded as a hire purchase, the lessor is, for taxpurposes, considered to have sold the leased object to the lessee. This salemight give rise to a taxable gain or deductible loss. The ongoing rentalpayments will then be considered to consist of two parts, one part being the

return of the principal amount and one part the interest. Only the interest partof a rental payment will constitute taxable income.

The treatment described above also applies to leasing agreements regardingreal estate.

Taxation of lessee - Corporates

The lessee is entitled to deduct lease payments as operating expenses of thebusiness in the same scal year as the obligation to pay the rent arises. If therents are paid as a lump sum, they are spread and periodized across thoseyears, which fall within the contract period.

If the lease agreement is regarded as an installment purchase, the lessee isallowed to deduct the interest part of the rental payment and an operatingcost. In addition, he is entitled to depreciation, as a part of the paid rent isregarded as an acquisition cost of the lease object.

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Tax depreciation

Depreciation of xed leased assets is computed in accordance with thegeneral rules of tax law, under which the declining-balance method isadopted as the primary method of depreciating equipment and machinery,buildings and other constructions. The acquisition cost of the taxpayer's entirestock of machinery and equipment can be written-off annually from thepooled net book value of all such assets and the maximum annualdepreciation is 25%. Buildings and constructions are written off annually andseparately for each building or construction and the maximum depreciation isbetween 4% and 20% depending on the nature of the building or construction.

Transfer of ownership of asset or of rentals

There are no particular tax regulations concerning the disposal of leasedobjects. Each sale of leased assets follows the general tax rules.

When alienating assets a transfer tax liability may arise. A transfer of ownership of real property is subject to a transfer tax, currently 4% of the salesprice.

Capital gains are usually treated as normal taxable business income for

corporates. The taxation of gains is indirect regarding movable property, i.e.the sales proceeds reduce the pooled tax depreciable asset base and the taxbook value. Capital gains from disposal of immovable property results in adirect increase in taxable income.

International issuesTaxation of non-resident lessor/resident lessee

No particular difference exists between domestic and cross-border leasingwith respect to the deductibility of the payments or depreciation.

Based on the Finnish case law, there is no withholding tax on lease rentals

paid abroad on movable property. Neither does the lease of equipment ormachinery as such constitute a permanent establishment in Finland.

Taxation of resident lessor/non-resident lessee

Under tax treaties, leasing payments for the right to utilize certain industrial,commercial or scientic equipment may, in some cases, be deemed asroyalties. Withholding taxes paid in the country of the lessee can usually becredited against the income taxes paid by the Finnish lessor. The creditcannot, however, exceed the Finnish taxes paid. The credit is also possible insituations where no tax treaty exists between the Finnish lessor and theforeign lessee.

VAT

In principle the lease of movable tangible property without any purchaseobligation is regarded as a service subject to VAT at the standard rate,currently 24% in Finland. Generally this VAT interpretation and VAT treatmentdo not make any distinction between nance and operating leases. However,in cases where the lessee/buyer has an obligation to redeem the goods at theend of the leasing period and the lessor/seller is liable to allow this, thesupply is treated as a supply of goods (e.g. a hire-purchase transaction).

The leasing of immovable property is not subject to VAT unless the lessorchooses to opt for VAT. The option is allowed in respect of buildings and otherimmovable property used in the lessees taxable business.

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201309 Wcg Finland Auto and Asset Finance Country Survey

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Transcript of 201309 Wcg Finland Auto and Asset Finance Country Survey