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Background:
Related party (ultimate parent) provides a vehicle (material value to the business) to be used for free by the subsidiary in a different country. The ultimate parent remains the owner of this asset.
The asset value is known and shown on the import declaration form. The full value of this asset is known.
The subsidiary is a startup company and will not be able to pay anything in the foreseeable future.


Questions:
- Assets contributed for free from parent entities are generally to be classified as equity contributions if the ownership is as well transferred - this is not the case in this example
- In this case the parent remains the owner but it isn’t defined what should happen at the end of the life of the asset. It is as well not defined what the value of this usage would represent.
- How can this case be treated for accounting purposes as the subsidiary practically doesn’t pay anything for it but will generate revenues from this asset?
- Which IFRS Standards would apply?
- Are there any guides that cover this topic which are available?
- How would you treat it in terms of accounting and if anyone volunteers to provide practical recommendations for transfer pricing compliance for this case?

How material is this?

If material, in my opinion this should be recorded as a lease. You would recognise the right of use of the asset (for its market value) against a liability. Since you are not planning to pay the liability, that could be considered an equity contribution.

This is just a thought. Not my area of expertise.

DJP, I was thinking simply a 'contribution' equal to the value of otherwise leasing the vehicle, I suppose it depends how formal the arrangement is, eg if they've offered it for a period of time or if they'll take it back next week...

The length of time is a judgment that management will have to make. What I was trying to point out is that what they are getting is the right of use of an asset, not the asset itself.

Yes I agree and I suppose the specifics of the case will determine if the vehicle is controlled, or if expected period is within short term exemption etc.

In this case the usage will be much likely for the lifetime of the vehicle. But no price has been agreed as it can be used for free and it will generate revenues for the business. We could argue that it is as well used for R&D purposes at this stage of the company as it is a startup.

As it comes in for free but the owner remains to be the parent I could imagine that it is treated like a capital contribution.
In case the business records it at an expense for the "deemed" value of the rental which it later will convert into equity it would attract taxes.
Therefore from a tax perspective I would rather prefer it to go straight into equity.

If anyone has another solution for a real life example I would appreciate to hear about it.

How did the parent treat it?

This is what we are figuring out at the moment. From a tax perspective it would be the best to having it as an equity contribution in the subsidiary (there you recognize it as an asset which will be depreciated over 4 years when the business eventually will make profits and will be able to match the depreciation against the income). As well from a handling point of view if the receiving country doesn't have any statutory requirements for such assets to be audited before accepted to be put in as equity; then it would be best if it would represent an equity contribution.

My question remains: Did you have such a case in reality and how did you treat it?

Probably contribution yes but with a letter from the parent saying that is what they intend...

This might be a matter of internal policy choice.

Thanks for your contributions so far.

Happy to receive further comments from people who had such a case in reality and how they treated it?