Sale and leaseback

What it means

A sale and leaseback is a transaction in which a company sells its own asset, most often property, machinery or vehicles, to a leasing company or investor and at the same time leases it back. The asset stays in the company's physical use and is used exactly as before, but the buyer becomes its owner.

The main purpose is to release cash tied up in the asset. The company receives the sale price up front and pays regular lease instalments instead. A sale and leaseback is thus a form of asset-backed financing that can complement or replace a bank loan, for example in refinancing or to fund growth.

The leaseback can take the form of a finance lease, where the company usually buys the asset back at the end, or an operating lease, where the asset is returned when the lease ends. This determines the accounting and tax treatment, which has specific rules for leasebacks.

How it works in practice

Companies use sale and leaseback when they need to strengthen working capital, fund an investment or acquisition, or when much value is locked in property and they want to focus on their core business. For property this often means long leases of ten years or more with fixed rent and indexation.

The Income Tax Act has specific rules for finance leasebacks that limit the deductibility of instalments, so that a company gains no advantage merely from depreciating the same asset twice. The sale is also a taxable supply for VAT, with an exemption option for property. A tax analysis before the transaction is essential.

Under IFRS 16 the key question is whether a genuine sale has occurred. If not, the transaction is recorded as a financial loan secured on the asset. Under Slovak rules the treatment depends on the type of lease. The transaction affects the balance sheet, the result and the ratios banks monitor under loan agreements.

What to watch out for

A leaseback is more expensive than ownership. Total instalments over the lease term usually exceed the sale price received, since they include the financier's return. Compare the effective cost of financing with alternatives, such as a loan secured on the same asset.

Mind the contract terms: early termination options, rent increases, maintenance and insurance duties, and buy-back conditions. With a long property lease the company loses control over what happens to the property after the contract ends, which can be a problem for a production site that cannot easily be moved.