What to look out for in implementation

Equipment-as-a-service (“EaaS” or “asset-as-a-service (AaaS)”) describes a business model in which production systems or machinery (the “product”) are not purchased by the company that uses them but are made available by a provider – often the manufacturer – for a service fee as part of a rental or leasing model. In this service-based business model, value is not only generated by providing use of the product but also by providing related services, such as maintenance, repairs, providing software updates, and integration of the product into the systems and production environment. This business model also has significant benefits to the business using the product because capital expense ends up being lower than with buying industrial machinery because acquisition and operating costs are lower. 

From the manufacturer and provider’s perspective, implementing this business model harbours various legal, tax and other issues.

The need to act on the legal side

·        Contract drafting: EaaS services require the contractual ecosystem between all the involved parties to be carefully analysed. Because this kind of contract is a mixed contract, containing elements of rental/leasing, service, and potentially also aspects of employment law, the parties’ contractual obligations should be defined individually. This can also include a definition of the contributions to the service to be provided by the customer in terms of system requirements and product and material specifications. Apart from licence rights (including for third-party software), service levels and arrangements on the product’s (planned) life cycle, warranty and liability also have to be arranged, particularly with respect to potential down-time and damage scenarios when, as part of an EaaS model, an industrial machine is integrated into complex IT and systems or is connected to products/components from other manufacturers.

·        Rights to data: The continuous evaluation of machine data offers manufacturers and EaaS providers the way to improve the functions of the machines and their design as well as strategies for proactive maintenance and the development of new services. That is why it is absolutely necessary to have access to data and allocate rights to machine-generated data. In this regard, the Data Act that came into force at the start of 2024 is particularly important because this piece of EU legislation on data law creates a new regulatory system for data access and claims to disclosure. To the businesses concerned (manufacturers, providers, users of EaaS products/services) and other third-party market participants, this presents particular challenges – but also opportunities to develop and improve data-driven business models. The rules of the Data Act are to be incorporated into the contracts between the involved parties in particular.

·        IT and cyber security: Because EaaS products can be accessed remotely and integrated into the user’s IT and systems or into its IoT cloud, the legislation to strengthen IT and cyber security is of particularly importance. This is a matter of avoiding compromising the integrity of production data, the leakage of know-how and data manipulation in transferring production data to the provider or within the user’s organisation.

·        Safeguarding trade secrets: The legal protection of trade secrets and know-how plays an important role in the EU Trade Secrets Directive and the Trade Secrets Protection Act. Besides contractual arrangements, for legal protection to be obtained also requires the parties to agree and implement appropriate technical and organisational measures (TOMs) in order to effectively protect the customer’s trade secrets and production environment as well as that of the provider/manufacturer. It is therefore recommended to carry out a due diligence audit of the TOMs implemented, especially at the recipient of the trade secrets.

·        Artificial intelligence (AI): Inasmuch as AI is used as part of the EaaS business model, the EU AI Act, expected to come into force in spring 2024, will have to be applied with regard to such things as process optimisation, proactive maintenance, quality assurance and data analysis. This follows a risk-based approach and may, alongside duties to documentation-keeping and transparency, require setting up governance structures to monitor and conduct risk assessment of AI systems.

Challenges for accounting

Challenges for accounting: The asset underlying the EaaS contract is as a rule to be economically allocated to the EaaS provider and therefore to be reported by the provider. The business using it, however, only has to record the fee agreed in the EaaS agreement in its income statement as ongoing expense that reduces earnings and tax on earnings, like a standard rental agreement, without the business using the asset having to capitalise it. By using an EaaS model, the business using it saves itself not only the often substantial capital expenditure but, by exploiting the services included, also avoids the operational risks like maintenance, repair and servicing, and also enjoys the benefits of an off-balance sheet arrangement. EaaS is therefore very flexible for the business using it, and at the same time ties up little capital, which is easy on liquidity.

Tax aspects

The tax aspects of EaaS contracts also have to be considered. It is often necessary to split these mixed contracts into a rental/leasing component, service component and work-result component, which are evaluated separately in terms of tax on earnings and VAT. 

Further tax issues must be considered in the international context, which can lead to unexpected costs if they are only identified after the fact. For example, import sales taxes and customs duties are typically incurred if the product is to be delivered to EaaS customers in third countries. It should be examined and contractually agreed in advance who is to act as the importer and bear the duties. It must also be clarified whether by providing and maintaining the plant abroad the provider founds a taxable permanent establishment, which would result in tax registration and on-going declaration duties. If a double tax treaty (DTT) exists with the target country, it is usually possible to avoid a permanent establishment being recognised for income tax if the local deployment of staff is less than 6 months in a 12 month period. Furthermore, it would also be necessary to clarify whether providing the plant (without staff locally) in the target country already constitutes a permanent establishment, particularly if maintenance and services are provided remotely. For example, fully automatic pumping stations and similar plant may be classed as a permanent establishment if staff are present at the installation locally at least some of the time. Finally, income in the target country may be subject to withholding tax (e.g. on a technical service), meaning that any deductions on withholding tax under a DTT or the question of who will bear the costs should be clarified in advance.  

ESG/Circular economy

As part of the sustainable transformation of the economy, the EU is aiming to introduce rules to increase the efficiency of resources and to foster the circular economy. By completing the cycle of materials and energy, the use of raw materials is to be reduced, the burden on the environment reduced and economic potential released. Business models like EaaS offer companies large opportunities to successfully cope with this transition.

The continual access to machine data and the improvement in maintenance and repair management ensuing from it as well as product design can significantly extend the lifespan of machinery. Returning the equipment to its owner allows for it to be professionally put in order, maintained and reconfigured. Furthermore, reclaiming resources for potential re-use is also simplified. Regarding the complexity of material cycles, it is crucial to make flows of materials measurable across the entire life-cycle and along the value chain.