This article addresses the distinction between financial leasing and operating leasing, which is
frequently encountered in the legal and tax characterization of lease arrangements. Because the
name of the agreement or the labels used by the parties do not always correspond to the
economic substance of the transaction, misclassification may directly affect both the order of
accounting records and the tax base. The main purpose of the study is to set out the criteria on
which the distinction between financial leasing and operating leasing should be based, then to
explain why correct classification is mandatory pursuant to Article 290/3 of the Tax Procedure
Law (VUK), and to discuss how mischaracterization may lead to different outcomes in tax
obligations. Within this framework, the definitions in Law No. 6361 and the valuation and
recognition approach of the VUK are evaluated together; in particular, within the context of the
principle of assessing the true nature of the agreement, attention is paid to the tax effects of
registry procedures, term extensions, and successive agreements.
What Are Financial Leasing Agreements? Under Which Legislation Are Financial Leasing
Agreements Regulated?
In practice, financial leasing often appears as a medium and long-term leasing model that
finances the acquisition of an investment asset, in which significant risks and rewards pass to the
lessee. In Turkish law, financial leasing agreements are mainly regulated under Law No. 6361 on
Financial Leasing, Factoring and Financing Companies, and the activities of financial leasing
companies as well as the establishment and registration regime of the agreement are determined
within the framework of this Law. From the perspective of tax law, the special rules on the
valuation and accounting recognition of financial leasing transactions are set out in Article 290 of
the VUK; this regulation provides a framework that takes the economic substance as the basis for
the tax characterization of the transaction.
In Law No. 6361, operating leasing is defined as a general category used for leases other than
financial leasing.
In practice, the main differences between financial leasing and operating leasing can be
concretized through certain typical indicators. According to Erol, Yildirim and Toroslu (2008, p.
39), while the lease term in financial leasing may be medium or long term, the term in operating
leasing is more often short term. In financial leasing, ownership of the asset may pass to the
lessee at the end of the lease term, whereas in operating leasing the ownership of the asset, as a
rule, does not pass to the lessee. A sale of the investment asset at a pre-determined price may
be agreed in financial leasing; in operating leasing, such a purchase option is generally not
provided. While in financial leasing it is expected that the lease term constitutes a longer period
in relation to the economic life of the equipment and that the present value of lease payments is
often higher than the equipment price, in operating leasing the lease term covers a shorter portion
of the economic life and the present value of lease payments remains lower.
A critical point in terms of the contractual consequences of this distinction is the following: in
financial leasing, all rights and obligations – other than the ownership right over the leased asset
and the obligations arising directly from the ownership right – as a rule belong to the lessee (Topuz,
2013, p. 87).
“Law No. 6361 Art. 18: (1) A financial leasing agreement is an agreement that provides
for the lessor, upon the request and selection of the lessee, to leave to the lessee the
possession of an asset which the lessor has purchased from a third party or directly
from the lessee, or has procured by other means, or has previously acquired into its
ownership, in return for a lease payment, so as to enable the lessee to derive all kinds
of benefits.”
“Law No. 6361 Art. 3/1-ç: Provided that it is based on a financial leasing agreement,
the leasing transaction that satisfies any of the following – transfer of ownership of an
asset to the lessee at the end of the lease term for the purpose of providing financing
by a lessor authorized under this Law or relevant legislation; granting the lessee the
right to purchase the asset at the end of the lease term for a price below its fair market
value; the lease term covering more than eighty percent of the economic life of the
asset; or the sum of the present values of lease payments to be made under the
financial leasing agreement constituting a value greater than ninety percent of the fair
market value of the asset …”
“Law No. 6361 Art. 3/1-b: Operating lease: … expresses the leasing transaction … that
falls outside of financial leasing …”
Why Is There a Need for VUK Article 290/3?
Article 290 of the VUK clarifies, for tax purposes, which lease qualifies as a financial lease by
regulating the characteristics of financial leasing transactions and the principles according to
which the rights, liabilities and economic assets related to these transactions are to be
recognized in accounting records. In this way, it serves to ensure consistent tax characterization
based on the true nature of the transaction, preventing purely formal classifications from
undermining tax certainty. In particular, the definitive statement that the agreement will be
deemed a financial leasing agreement where the lease term covers more than 80% of the asset’s
economic life or where the sum of the present values of lease payments under the agreement
constitutes a value greater than 90% of the asset’s fair market value makes the distinction clear.
“VUK Art. 290/3: In a leasing transaction; transfer of ownership of the asset to the
lessee at the end of the lease term, granting the lessee the right to purchase the asset
at a price below its fair market value at the end of the lease term, the lease term
covering more than 80% of the economic life of the asset, or the sum of the present
values of lease payments to be made under the agreement constituting a value greater
than 90% of the fair market value of the asset – where any of these conditions exists,
the leasing transaction is deemed a financial lease.”
If an operating lease agreement is extended or amended so that it meets the conditions set
forth in VUK Art. 290/3, is it possible to characterize this agreement directly as a financial
lease? Is it necessary for the parties to make an additional declaration of intent or to
register it in the registry?
Where an agreement established as an operating lease is modified through a term extension or
amendment so as to satisfy the criteria set forth in VUK Art. 290/3, the question of whether the
relationship will automatically transform into a financial lease must be addressed separately
under private law and tax law. From the perspective of private law, the first point of assessment
is whether the formal validity requirements for a financial leasing agreement have been met.
It is known that written form is a validity requirement that must be ensured for financial leasing
agreements. However, whether registration in the registry is a condition of validity is worth
examining. Because if validity depends on registration in the registry, then even if the extended
agreement satisfies the conditions to be a financial leasing agreement in terms of its substance,
it will not be possible to say that it is a financial leasing agreement since the validity requirements
have not been fulfilled.
“Law No. 6361 Art. 22: ‘… Agreements relating to immovable property shall be
annotated in the annotations section of the land registry where the immovable is
located; agreements relating to movable property that has its own special registry
shall be registered and annotated in the registry in which such assets are recorded and
shall also be notified by the lessor to the Associatio.
(2) Agreements relating to movable property that is not recorded in a special registry
shall be registered in the special registry to be kept by the Association… (5) After
registration or annotation, the acquisition by third persons of in rem rights over the
asset subject to financial leasing may not be asserted against the lessor…’”
During the period of the repealed Law No. 3226, there was a prevailing view and Court of
Cassation practice that registration was a condition of validity. For instance, the 8th Civil
Chamber of the Court of Cassation accepted – under Law No. 3226 on Financial Leasing – that
executing the financial leasing agreement in the form of a notarized deed and registering it in the
special registry for movable assets were mandatory elements for the validity of the agreement;
this approach led to the conclusion that registration was constitutive rather than declaratory
(Court of Cassation, 8th Civil Chamber, 2019).
However, although the wording of Law No. 6361, which replaced the repealed Law No. 3226,
appears to reduce the registration step to a function of opposability against third parties, the
issue remains open to debate. In doctrine, there is no consensus as to whether registration or
annotation has a constitutive effect for the validity of the agreement or merely a declaratory
effect. One view argues that unless registration or annotation is made, the agreement will not be
valid, i.e., it has a constitutive effect, while another view argues that it is merely declaratory
(Kirmizitas, 2016, p. 66).
In addition, in a decision of the 10th Chamber of the Council of State, registration/annotation was
evaluated not as a constitutive condition, but rather as a mechanism that, after the agreement is
concluded, serves the functions of opposability against third persons and publicity (Council of
State, 10th Chamber, 2021).
If registry registration is assumed to be constitutive, how should agreements that meet the
conditions of VUK Art. 290/3 but are not titled as financial leasing agreements, and
financial leasing agreements that have not been registered in the registry, be declared?
Even if it is accepted under private law that the validity of the agreement depends on registration
or annotation in the registry, it would not be appropriate in tax law to reduce characterization
solely to formal elements.
The basic norm on which this approach rests is VUK Art. 3/B. VUK Art. 3/B expressly states that
the true nature of the taxable event must be taken as the basis. This approach means that, in the
distinction between financial leasing and operating leasing, tax characterization will be made not
according to the name of the agreement, the labels used by the parties, or formal elements, but
according to the economic substance of the transaction. Therefore, although the registration or
annotation mechanism envisaged for financial leasing agreements under Law No. 6361 has the
functions of opposability against third persons and publicity in private law, it does not by itself
determine whether the transaction carries the character of financial leasing for tax purposes. Tax
assessment is made, in the concrete case, by taking the true nature of the transaction as the
basis -i.e., through criteria such as to whom risks and rewards have actually passed, what portion
of the economic life is covered by the lease term, the ratio of the present value of lease payments
to the fair market value, and similar indicators.
“VUK Art. 3/B: ‘In taxation, the true nature of the taxable event and the transactions
related to this event is essential.’”
From an accounting perspective, what difference does it make whether the agreement is a
financial leasing agreement or a lease agreement?
In financial leasing agreements and operating (operational) leasing agreements, the order of
accounting records and, accordingly, the tax consequences may differ. Indeed, since under VUK
Art. 3/B, taxation is based not on the naming of the transaction but on the true nature of the
taxable event and the transactions related to it, characterizing the same agreement differently
may lead to different risks of tax assessment.
In financial leasing agreements, from the lessee’s perspective, payments are often recognized by
separating the principal and the interest/financing component; whereas in operating leasing the
amounts paid are generally recorded directly as lease expense or lease income.
In operating leasing, the lessor generally tracks the leased asset as a fixed asset on its balance
sheet and allocates depreciation for this asset; depreciation expense affects the tax base. In
contrast, in financial leasing, since economic benefits and risks are deemed to have passed to
the lessee, the lessor, as a rule, cannot allocate depreciation for the leased asset; from the
lessor’s perspective, the transaction is recognized not as an asset kept on the balance sheet but
as a financial asset in the nature of a financial leasing receivable.
As a result, the true nature of the legal relationship and the corresponding accounting order
matter, because they may affect the tax base and therefore potential assessment/penalty risks.
What risks arise if a financial leasing agreement is taxed as an operating lease agreement?
Are there administrative or criminal sanctions?
Taxing a transaction that has the character of financial leasing as if it were operating leasing may,
first of all, lead to a difference in the tax base and, accordingly, to the risk of underpayment of tax.
In the VUK, tax loss is defined as the situation where, due to the taxpayer’s or responsible person’s
failure to fulfill tax related obligations in a timely and complete manner, the tax is not assessed
on time or is assessed in an incomplete manner; and it is accepted that a tax loss penalty will be
applied in case tax loss occurs (Tax Procedure Law No. 213, Arts. 341-344).
Under the valuation regime in Article 290 of the VUK, it is regulated that liabilities and receivables
arising from financial leasing transactions cannot be subjected to reeskont (discounting).
Therefore, treating the transaction as operating leasing and reducing the tax base by applying
reeskont may create a risk of correction and penalized assessment in tax audits (Tax Procedure
Law No. 213, Art. 290/2).
In terms of administrative sanctions, in the event of tax loss, in addition to the application of a
penalty over the tax lost, default interest and assessment processes may arise pursuant to the
relevant procedural provisions. As for criminal liability, misclassification does not, by itself,
constitute a crime in every case; however, it should not be overlooked that if the act is carried out
together with acts falling within the scope of VUK Art. 359 – such as fraud in books and records,
issuing or using forged documents – judicial sanctions may also be at issue (Tax Procedure Law
No. 213, Art. 359). Therefore, ensuring correct classification from the outset; and establishing
consistency among the agreement text, additional protocols, payment plan, and accounting
records constitute a fundamental compliance measure that reduces both administrative and
criminal risks.
In summary, the fact that a leasing transaction has the character of financial leasing makes the
accounting order more complex; and in particular, the incorrect application of depreciation,
financing expense and valuation rules may bring significant assessment and penalty risks onto
the agenda.
CONCLUSION:
The distinction between financial leasing and operating leasing is a characterization issue that
determines not only how private law relationships are established, but also the tax and
accounting consequences. While Law No. 6361 sets out the legal framework and registry regime
of the financial leasing agreement, VUK Art. 290/3 and VUK Art. 3/B emphasize that economic
substance will be taken as the basis in taxation, and build classification on the true nature of the
transaction. For this reason, regardless of the name of the agreement, term extensions or formal
deficiencies, where risks and rewards are actually transferred and the criteria are met, it is
possible for the transaction to be assessed as financial leasing for tax purposes. Correct
classification is of fundamental importance both for the accuracy of accounting records and for
tax certainty.