Telcos board the QTE

The Qualified Technolgical Equipment (QTE) lease started life as a simple and fully defeased equipment lease targeted at highly rated telecom companies (telcos). US investors are increasingly prepared to accept lower rated, albeit investment grade, lessee credit risk. Facility transactions are also under consideration in the market, as well as enhanced structural techniques that include residual value guarantees and rental deferrals.

QTE allows a non-US telephone company to take advantage of a crossborder leasing opportunity in the US - if the equity investor and its US tax counsel agree that the telecoms equipment to be leased, is classified as QTE.

The IRS code states that, qualified technological equipment leased to a tax exempt entity for a period of more than five years is tax-exempt use property and must be depreciated under S168(g). The definition of "tax exempt entity" includes foreign persons or entities, for example, non-US resident telcos.

Internal Revenue code S168(g)(1)(A) states that for any tangible property which during the taxable year is used predominantly outside of the US (apart from some exceptions given in S168(g)(4)), the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system of S168(g) and not 168(a).

S168(g)(3)(C) states that in the case of qualified technological equipment, the alternative depreciation system refers to a "half-year convention" straight-line method with zero salvage value over five years notwithstanding the existence of the S168(g)(3)(A) 125% pickle rule. That is, that the lease term be disregarded when determining the recovery period.

If the telecoms equipment could not be considered to be QTE then the recovery period would be equal to the class life of around five years for digital switching equipment, and no less than 125 % of the lease term.

QTE defined

S168(i)(2)(A) defines qualified technological equipment as meaning: any computer or related peripheral equipment; any hi-tech telephone station equipment installed on the customer's premises; and any hi-tech medical equipment.

It is therefore necessary that the telecoms equipment be classified as computer or related peripheral equipment.

The reason Hambros has not considered leased telecoms equipment to fall under this is that there is no legislative guidance in section 168 or its history which provides a definition of what is "installed on the customer's premises" or a definition...