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.”
Improved accessibility crucial for companies
Traffic congestion is a major concern for working Belgians. In fact, it has become such an issue that it is having a severe impact on job satisfaction. Even your retention policy is suffering because of it.
Almost one-quarter (23%) of all employees want to change their job. This is not because they are fed up with the job itself, but simply because they want to work closer to home and reduce their commuting time, according to a study carried out by Securex.
The HR service provider asked 1,671 Belgian employees how long it takes them to travel to and from work. People living in Brussels are especially tired of commuting, Hermina van Coillie, HR expert at Securex, found.
"No fewer than one in three Brussels-based employees are considering changing their job due to their journey to work. This figure is one in four for Wallonia and one in five for Flanders. It also comes as little surprise that people with children (31%) in particular dream of working somewhere closer to home, even if that is not always the magic solution. The study makes it clear that moving elsewhere doesn't always reduce commuting time."
In any case, these are troubling statistics for companies that prefer to see their employees arriving in the morning with a smile on their face.
Increasing travel times
It is not so much the distance that presents a problem to commuters, but the travel time. And it is continuing to increase. On average, Belgian commuters lose up to 54 minutes per day travelling to and from their workplace. Much depends on the means of transport. Commuters who walk or cycle to work spend an average of 29 minutes per day in transit. Driving to and from work can take up to just under an hour. How about the train? The outlook is not good: although public transport is often touted as a congestion-free alternative, travelling by train, tram or bus results in an average travel time of 96 minutes per day. And if we will soon be able to work in self-driving cars (or take part in a car share scheme), the train threatens to lose much of its charm.
You might suggest to your employees that they change their address rather than their workplace. In that case, though, it is probably best for your company not to be located in the city centre. Your newly relocated employee may indeed have fewer kilometres to travel, but that does not necessarily mean that they save any time. An employee loses a total of 61 minutes while commuting to and from their place of work in a Belgian city. The time required is 15 minutes less if located outside the city. The situation is a major cause for concern in Brussels in particular. Around 60% of people working in Brussels spend more than an hour in transit. By contrast, this percentage stands at 21% in Flanders and Wallonia. Of everybody affected by the situation, Brussels residents have the worst of it. They lose more than an hour and a half (95 minutes) per day commuting to and from work. This fluctuates around the 50-minute mark in Flanders and Wallonia.
Emphasis on accessibility
The latest striking figures from the Securex study show that 71% of employees usually take the car to work, while 15% travel by foot or bike and 14% use public transport. If the predictions of the Federal Planning Office prove to be true, Belgian roads will continue to be congested well into the future. In fact, traffic jams are set to increase rather than decrease. On the road again… again… is the deceptively jolly sounding title of a study presented by the Planning Office at the end of 2015.
In a nutshell: if nothing changes, by 2030 we will be waiting in traffic jams even longer than we do today. If the policy does not change, the number of passenger kilometres will rise by 11% by 2030, while the number of tonne-kilometres will increase by 44% (compared to 2012). Road travel will remain dominant, accounting for 87% of passenger kilometres (82% by car) and 70% of tonne-kilometres (66% by lorry) in 2030. Consequently, average traffic speed will continue to fall. During peak hours, we will spend 24% longer stuck in traffic jams. It is not an especially rosy outlook...
Greater flexibility and lower costs thanks to mobility budget
Solving traffic congestion problems will require a broad range of solutions The mobility budget is one of these.
Is there a solution to traffic congestion? Constructing more roads is not the answer, because they will become congested as well before long. How about imposing a toll on freight transport? While this is supposed to reduce the number of lorries on the road, their place will probably be taken by passenger cars. Not only that, but a toll may make delivery vans even more popular than they already are. By 2030, the number of kilometres spent on the road by these vehicles will rise by 43%. The Planning Office estimates that the rise in duty on diesel will do little to combat congestion.
Many experts consider company cars to be one of the main culprits. They believe that the treatment of company cars is far too generous in Belgium. Both the OECD and the European Commission have criticised the tax benefits associated with company cars in our country. "Half the cars on Belgian roads are company cars", people sometimes claim. This is simply not true. The CVO (Corporate Vehicle Observatory) requested the registration figures for the Belgian vehicle fleet from FEBIAC (Belgian Federation of the Car and Two-wheeler Industries):
- Belgium has some 700,000 light commercial vehicles and 930,000 other vehicles (buses, lorries, motorcycles, etc.).
- However, passenger cars actually account for the lion's share of vehicles on the road, at 5.6 million. Of these, 4.48 million belong to private individuals and just 1.12 million to companies and self-employed professionals. It is clear, then, that the latter are not the only culprits when it comes to creating congestion. Abolishing tax benefits for company cars alone will not resolve the issue altogether.
A change of mentality
There is no miracle cure. The solution is like a jigsaw – it has multiple pieces. A change of mentality is required above all else. Perhaps you would like to encourage your employees to choose the most efficient, least polluting and reasonably priced mode of transport for every journey. A mobility budget would make this a possibility in the future. The experts at Arval Belgium, one of the major players in the lease market, are preparing a suitable approach. Els Costers (Sales Director at Arval Belgium):
"The concept is simple. Instead of giving employees a car, parking space, rail pass or rental bike, they receive a mobility budget. This budget enables the employer to set an agreed amount to be spent by the employee on a range of transport options: company car, public transport, bicycle, pool car, etc. The employer specifies the budget size and the means of transport available. The employer and employee also discuss the types of commute that the mobility budget is intended for: commuting to work and professional travel only or private use as well."
The mobility budget has many advantages for employers:
- You are seen as an attractive employer, because you encourage a flexible working environment and you offer your employees freedom of choice and flexible mobility solutions.
- You meet your CSR targets (corporate social responsibility) by stimulating public transport usage and by reducing the number of cars deployed, kilometres travelled and litres of fuel used.
- You lower your TCM (total cost of mobility), because you have more control over your lease vehicles, increasingly pay for use rather than ownership, and reduce administrative burden.
In turn, your employees have more freedom and flexibility when organising their travel. Last but not least, it also benefits the environment. The then Flemish Mobility Minister Hilde Crevits commissioned the Mobility budget works pilot project in 2012. The project showed that employees with a mobility budget decide more often not to use a car in favour of a different mode of transport. Car usage for journeys between home and work fell by 37% among the five companies that tested this system.
The mobility budget is evidently a fantastic system. So why is it not yet being utilised all over the country? Well, proponents of the system are waiting for a new law to resolve a series of legal stumbling blocks, especially with regard to taxation and social security. The bill has already been drawn up. Els Costers:
"Today, it is impossible for an employer to make all modes of transport available to employees. The legal rules are different for professional, commuter-based and private travel, and they also change depending on the means of transport. This makes the administrative side of things highly complex and time-consuming. The mobility budget intersects all of these rules. The new law needs to resolve this. Once it is passed, things can move quickly."
Ready for the mobility budget? Here are a few simple rules to take on board.
To implement a mobility budget, an analysis needs to be made of travel habits and the way in which the organisation functions. This analysis enables you to see which combinations are desirable, feasible and profitable.
Involve social partners when introducing a mobility budget.
The following combinations are now feasible from a tax perspective:
company car and tax-free company bicycle
company car and bicycle allowance
company car and public transport
a smaller or electric car for daily usage with a larger family car for holiday periods. In this case, the benefit in kind must be calculated according to usage.
Focus on maximum flexibility. A package such as Arval Select makes it possible for drivers of lease cars, for example, to use different vehicles depending upon their varying mobility needs.