What is meant exactly by these terms, often used incorrectly in everyday speech?
Leasing is a contract by which the lessor, in exchange for payment, gives the right to use an asset for an agreed period. The leasing company remains the legal owner of the asset throughout the contract. The ownership of the asset may or may not be transferred to the lessee at the end of the contract. Contracts which provide for the direct transfer of the legal ownership of assets to the customer from the start are not considered as leasing contracts.
Leasing was introduced in Belgium in November 1961. However, it had to wait six years, and more specifically for Royal Decree no. 55 of 10 November 1967, to be given legal status.
This royal decree, still applicable today, determines the criteria which the transactions must meet and sets the principle of approval by the Federal Public Service Economy in order to be able to practise this activity.
It distinguishes non-real estate leasing from real estate leasing:
- Non-real estate leasing
- must be based on capital goods for business use
- the lessee chooses the equipment itself
- the term of the lease corresponds to the estimated economic life of the asset
- the amount of the lease payments is established so as to amortise the amount of the investment over the term of the lease
- the lessee can become the owner of the asset by exercising the purchase option
- Real estate leasing
- must be based on constructed buildings (i.e. it is not possible to take real estate leasing on land only)
- the term of the leasing contract must be fixed and the contract cannot be terminated
- the lessor must give the lessee enjoyment of the building and land on which it is erected
- the lessee can become the owner of the asset by exercising the purchase option
The market distinguishes two possible leasing schemes:
- Financial leasing: this is the oldest and simplest scheme, in the sense that few services are associated with it. It has the advantage of spreading the payment over a defined term.
Although the lessor is always the legal owner of the asset during the term of the leasing contract, in practice, it is the lessee who benefits from the asset as if they were the owner, i.e. it is the lessee who bears the risks and draws the benefits resulting from the ownership of the asset.
- Operational leasing: this is often accompanied by a range of additional services, i.e. in addition to administrative and financial functions, the lessor provides support as well as technical management of the assets.
Here, the lessee does not bear the risks or draw the benefits of ownership.
When leasing appeared on the Belgian market, transactions were not recorded in the annual accounts of the lessee. The lessee treated these leasing transactions as lease contracts and recorded the regular leasing payments in its accounts as general expenses.
As such, the company did not show in its annual accounts the obligations arising from leasing and its commitments were therefore underestimated.
At the request of the Banking Commission (now FSMA), the Royal Decree of 8 October 1976 was established. This changed the accounting principles of leasing transactions. Indeed, this decree states that the accounting treatment of leasing transactions will be based on the economic ownership of the asset (and not exclusively on the legal ownership rights).
One of the results has been to force the lessee to show leasing transactions on its balance sheet. This is not the case, however, for leasing of non-real estate assets with purchase options of over 15% as well as for some forms of real estate leasing.
Is leasing also suitable for your company?
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Ask the right questions
- Do you already have several "traditional" financing obligations at present?
- Are you nurturing short-term projects that will require use of your liquid funds?
- Would you like the option of regularly renewing your equipment (cars, computers, etc.) and not having to worry about re-selling?
- Would you like to stagger payment of VAT linked to your purchase?
- Do you want to benefit from additional tax advantages?
Choose the leasing that suits you best
- Are you searching for a solution that won't affect your balance sheet?
- Are you thinking of purchasing the equipment upon maturity of the leasing contract?
- Would you like to rid yourself of any administrative formalities (ordering, follow-up, maintenance, etc.)?
- Are you looking for an "all-inclusive" package (insurance, assistance, etc.)?
- Do you want to pay the same amount every month/quarter or a higher initial payment?
- In the case of vehicle or IT leasing, how many vehicles (commercial and/or passenger) or computers do you require?
The answers to these questions will allow your relationship manager to better define your needs and to determine the type of leasing you require. Please contact him or her if you require any further information.
Leasing: on-balance or not? And how to deal with VAT?
It's not always easy to navigate your way through the maze of leasing legislation. Our specialists explain.
Can the customer choose not to enter its leasing on its balance sheet?
Philippe Tilkin, Marketing & Solutions Manager at BNP Paribas Leasing Solutions:
“This depends on the scheme in question. In the case of leasing based on capital assets (car, IT or other), there are two possibilities. Either the purchase option is less than or equal to 15% of the investment amount and the lessee will amortise it on their balance sheet (on-balance sheet leasing). Or the purchase option is greater than 15% of the investment amount and they could book it as general expenses on their income statement. This will allow them to reduce their taxable profit and therefore the amount of tax to be paid. The transaction will then be entered on the balance sheet of the lessor and not on that of the lessee (off-balance sheet leasing).
There are also two options if the leasing relates to a building. Either the capital is fully repaid during the term of the lease (full pay out) and then the transaction is accounted for on the balance sheet (realisation and amortisation by the recipient, debt on the liabilities side). Or the transaction is not fully paid out – usually a contract with a residual value of 10% for the building, plus the value of the building lot if part of the lease – and then the transaction is not accounted for on the balance sheet (the leasing payments are considered costs).
I would like to stress that all this is ‘within the meaning of current legislation’, as the international accounting regulations seem to be gaining ground. As such, it could be that, in future, any transaction arising from leasing must appear on the balance sheet of the lessee. However, nothing has yet been decided. And I add the advice of Mr Tanguy van de Werve, Managing Director of Leaseurope (professional association representing the European leasing industry), who confirms that in a context where the European political decision-makers are striving to promote access to productive assets to boost growth, playing with the current leasing accounting model would carry considerable risks.”
How should the customer deal with VAT?
P. Tilkin: “Leasing allows companies liable to VAT to pre-finance it and spread the cost over the term of the contract. Furthermore, they can recover the VAT on leasing payments, and also on the interest included in the leasing payments. Finally, if the maintenance and repair costs are covered by the lessee, they are also liable for VAT and are therefore recoverable.”
Marc Melis, Sales Director at Arval: “In the context of vehicles, one of the advantages of operational leasing is the fact that the client only has to fulfil part of their VAT obligations, calculated on the delta between the initial investment and the salvage value of the vehicle at the end of the contract. Companies liable to VAT can recuperate part of the VAT paid by means of their monthly leasing payments. This recovery is done by way of VAT administration which, since January 2013, has established various methods in order to determine the level of recovery depending on the ratio of professional/private usage (with a maximum of 50%).”
P. Tilkin: “In terms of real estate leasing, the distinction should be made between recent buildings or buildings to be constructed, which are liable to VAT – and therefore recoverable provided that the recipient is liable to VAT and entitled to deduction –, and old buildings which do not fall under the VAT system. Consequently, you do not need to pay VAT on the rents.”
What is the future for mobility post-coronavirus?
The health and economic crisis has affected all aspects of every sector. Among them, mobility, for both private individuals and for companies.
Mobility is evolving every day. And it has been driven further as a result of the coronavirus crisis. Many people have been locked down and working from home has been widespread in many parts of the world.
The coronavirus crisis has changed concerns about transport
We are no longer moving around in the same way. And concerns are no longer the same. According to a BCG Consulting report, social distancing and vehicle cleanliness are the most important aspects for 41% and 39% of respondents, respectively, when choosing a mode of transport. There is also pre- and post-Covid mobility, with respondents being more likely to choose walking, their own bicycle or scooter, or their car than before the crisis.
Sustainable and alternative mobility in the years to come
Mobility has not necessarily waited for the coronavirus crisis in order to evolve. And, according to the same report, the share of more environmentally-friendly vehicles will continue to increase. By 2035, more than 35% of new vehicles will be electric cars, becoming the predominant form of motorised transport worldwide. Autonomous cars will also become more common, with 10% of vehicles being level 4 vehicles (able to travel without a driver, for example), and 65% level 2 or higher.
Customised mobility for employees, right now
The future of mobility is also relevant now, especially for businesses and the self-employed. The need for alternative modes of transport does not only concern private individuals, but also employees. There is no longer a single mode of transport for all situations, but a range of means depending on the need at a given moment. Electric cars, hybrid vehicles, electric bicycles, a public transport season ticket, car sharing, leasing, etc. These modes can take different forms and be combined in a mobility card, for example. There are benefits for the employees and managers of a company but also for the company itself through cost reduction, optimisation and fleet management.
Find out more about our tailor-made mobility solutions
The road to alternative mobility
Nowadays, responsible fleet management is built around sustainability. We're here to help you identify and realise your Corporate Social Responsibility ambitions.
Together we can cut your company's carbon footprint, improve employee mobility, and make sure these steps become a central pillar of your company's added value. In short, our aim is to have an alternative mobility policy.
We can help you make the switch to alternative mobility and new technologies to reduce your carbon footprint. Our SMaRT approach ensures your fleet has the best energy mix to match your strategy and driver profiles.
Alternative mobility needs new technologies to go hand in hand with new infrastructure. That's why we offer not only electric cars, but also the right charging solutions, too. As part of our integrated service provision we can determine how many charging points you need, install them, and manage how they are used both at the workplace and at the driver's home.
Modern mobility management is about more than just cars or vans. You need a 360-degree approach. We'll work with you to determine your mobility strategy and needs. Greener cars are just one of the options available. We have a number of mobility management solutions (such as the Mobility Card) and alternative mobility solutions (such as bicycle leasing) to inspire your organisation to offer a more flexible range.
Focus on employees
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