Two companies entered into an unwritten agreement for the sub-leasing of equipment that was already subject to a leasing arrangement. The sub-lessee initially paid the lessee the monthly instalments of the leasing, then paid the amount linked to the exercise of the option. The Tax authorities added back these monthly instalments to the income of the sub-lessee on the grounds that it represented a cost linked to the acquisition of goods. According to the Nancy Administrative Court of Appeals, in decision no. 94-658 of December 28, 1995, when a company acquires goods under a leasing arrangement, the rental that it pays during the rental phase of the goods is usually deductible from its income as an operating charge. The Court adds that, conversely, the goods to which title is transferred at the end of the leasing must be recorded on the balance sheet at their acquisition cost, which, theoretically, consists of the price agreed on for the exercise of the option. Consequently, when the Tax authorities intend to increase the acquisition cost of goods to which title is transferred at the end of the leasing operation, they must establish the undervaluation on the basis of all the terms and conditions of the contract since the start of the leasing operation, unless the Tax authorities recharacterize the transaction as a sale on instalments.
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