Technical terms simply explained

Here you will find a variety of technical terms from the world of leasing or installment plan, which we try to explain in a simple and comprehensible way.


Leasing is basically comparable to renting. It is therefore a temporary transfer of use in return for payment, whereby the legal and, in principle, also the economic ownership remains with the leasing company.

LeasingPilot note
Please note: In principle, the lessee does not acquire ownership of the leased asset at the end of the term, even if he has already fully amortised the leasing company's acquisition. For ownership to be transferred, a separate legal step must be taken, e.g. by right of tender or purchase option.  

Basically, a distinction must be made between so-called operating leasing, which is comparable to a rental, and finance leasing, in which the financing function is in the foreground (alternative loan-financed purchase or hire-purchase).
In the case of operating leases, the leased asset is only leased for a short period, measured against its normal useful life, or the lessee has the option of terminating the lease at short notice; the investment risk (in particular the risk of subsequent use or realisation) remains with the lessor.

In contrast, the finance lease is longer-term in terms of the ordinary useful life and does not provide for any termination option during a fixed basic lease term.

In the case of a finance lease, the lessee also generally has the option of purchasing the leased asset and retaining ownership at the end of the agreed leasing period, but not in the case of an operating lease.

LeasingPilot recommendation
Please clarify in advance whether the pure use of the asset is of primary importance to you and you would like to return the asset at the end of the term (e.g. car) or whether you would like to continue using the asset or actually prefer to purchase it (e.g. machine tool). The right choice of contract type is crucial - LeasingPilot will be happy to advise you on the options, e.g. agreeing a contract type with a purchase option.


Hire purchase

Hire purchase comes in two varieties, genuine and non-genuine hire purchase.
The more common non-genuine hire purchase corresponds to a purchase against payment in instalments with a fixed agreed transfer of legal ownership upon payment of the last instalment. 
The less common genuine hire purchase is a mixture of rental and purchase contract, where the hire-purchaser initially rents the asset, but has the right to buy the asset at any time or at the end, whereby the rental payments made to date are (partly) credited. 

Leasing - advantages

Leasing is a financing instrument with many advantages:


  •  is an ideal way to diversify your company's financing mix, so that working capital lines are available undiminished for working capital needs. Because leasing does not count against the possible credit line with your banks.

LeasingPilot note:
This assumes that the leasing company does not refinance with one of your banks.

  • preserves your liquidity: higher financing rates, up to 100% of an investment, are often possible and instalment payments begin with the use of the asset ("pay as you earn" effect), i.e. ideally you cover the instalment payments from the income generated by the asset.
  • offers a fixed calculation basis through fixed interest rates, which can, however, be flexibly adjusted if desired (e.g. degressive, seasonal, etc.): LeasingPilot note: Variable-rate offers are also available on the market.
  • opens up tax advantages by bringing forward expenses and when the interest barrier applies
  • avoids a balance sheet extension under HGB ("off balance effect") - this does not negatively affect the equity ratio and the rating. Other financial covenants such as leverage can also be positively influenced.
  • In the case of operating leases, the possibility of returning the property can be advantageous - if the residual value is calculated fairly.


Tax differences Leasing vs. hire purchase

Leasing (finance leasing)

If the basic lease term is more than 40 and less than 90 per cent of the normal useful life, the lessee does not become the owner of the leased asset for tax purposes. The asset does not have to be capitalised in the balance sheet (no balance sheet extension, also called "off-balance sheet effect"), which is why the equity ratio remains unchanged. Unlike hire purchase, leasing therefore has hardly any effect on the credit rating with the house bank. Moreover, the monthly leasing instalments are fully tax-deductible as operating costs (with the partial exception of the trade tax addition).

In the case of leasing, VAT is payable on all monthly instalments and special payments. However, if you are entitled to deduct input tax, this can be claimed as input tax.

LeasingPilot recommendation
According to recent rulings of the German Federal Fiscal Court, the 40% limit stipulated in the leasing decrees is not decisive, for example, in the case of partial amortisation agreements with a right to offer. If the off-balance effect is of interest to you with short financing periods, LeasingPilot will be happy to advise you on the possibilities.   

(Unreal) hire purchase

For tax purposes, the hire-purchaser is deemed to be the beneficial owner of the hire-purchase asset from the outset - i.e. even before the transfer of legal ownership upon payment of the final instalment. This means that the hire-purchaser must capitalise the asset in his balance sheet from the beginning of the contract, as in the case of a purchase. The agreed purchase price must be recorded on the liabilities side of the balance sheet. The monthly rent payments are considered instalments and are to be divided into an interest and a redemption portion. Only the interest portion is tax-deductible according to the general regulations, the repayment remains neutral - instead, the hire-purchaser can also apply the tax depreciation as with the purchase.

In the case of hire purchase, the VAT due on the total accumulated rental amount (sum of all instalments) is already invoiced at the beginning of the contract. Consequently, the hire-purchaser has to pay a considerable amount of VAT with the first instalment. However, if the tenant is entitled to deduct input tax, this amount can be offset again as input tax in the short term - in this respect there is hardly any difference to purchasing. On the other hand, the other monthly instalments are purely net instalments.

Sale & lease back

Sale & lease back is a special form of leasing in which the leasing company does not buy the leasing asset from a third party supplier, but from the lessee in order to lease it back to him in return. The leasing company becomes the legal and economic owner of the asset, which seamlessly remains in the possession of the lessee. 

In this way, assets that have already been purchased can be financed - in terms of effect, it is a retroactive financing option with which tied-up capital can be released and fresh liquidity generated.

Under commercial law, the leasing-typical "off balance" effect occurs; a disposal of the asset from the fixed assets is booked, possibly with realisation of profit (if necessary, disclosure of hidden reserves) and the addition of liquidity. 

In the case of valuable, readily marketable assets (no custom-made or self-produced items), sale and lease back can even be structured purely on an asset basis - irrespective of the creditworthiness of the seller and lessee.

LeasingPilot note
Sale & lease back is a form of financing with numerous advantages, but it is still viewed with suspicion in Germany and is seen by many as a signal of a lack of liquidity. Contractually, in addition to the leasing contract, only a supplementary agreement sale & lease back and a purchase contract need to be concluded, although in practice the handling sometimes has its pitfalls.  

Distinction from technical sale & lease back: 

Sometimes a sale & lease back has to be carried out for purely technical reasons, even for assets acquired shortly before, e.g. because they have already been delivered and paid for or because it would be too cumbersome to place an order with a large number of suppliers. Since in this case the focus is not on liquidity procurement, it is referred to as a technical sale and lease back.


Input tax/VAT

If you are entitled to deduct input tax, which should be the rule, the acquisition costs for leasing purposes and the leasing instalments must always be stated net, i.e. without VAT.

The leasing calculator also assumes that you are entitled to deduct input tax as an entrepreneur. 

For private individuals who are not entitled to deduct input tax, public lessees such as municipalities or entrepreneurs such as doctors and other freelancers or small entrepreneurs who are not entitled to deduct input tax, the VAT - which is not deductible - is part of the acquisition costs to be financed.

In this case, the instalments, any down payments, processing fees as well as post-rental proceeds/purchase option prices must also be taken into account including VAT.

If you are an entrepreneur and are not entitled to deduct input tax, please enter the gross acquisition costs in the leasing calculator, i.e. including VAT.


Utilisation rate

In almost all leasing and hire-purchase contracts, the start of the contract, i.e. the start of the agreed term, begins on the first of the next month, sometimes even at the beginning of the next calendar quarter. This extends the total term of the financing, so that for leasing to be tax deductible, care must be taken to comply with the 90% rule.

In addition, there is a remuneration regulation (so-called utilisation rate) for this period until the start of the contract in the amount of a 30th of the agreed rate per day.

These two contractual provisions therefore slightly extend the term of the financing and increase the overall financing costs. LeasingPilot will be happy to advise you on the effects.


Does equipment leasing offer tax advantages?

There are many advantages to leasing and hire-purchase financing, which we would like to present to you: Leasing often has undifferentiated "tax advantages", in particular that the "full" tax deductibility of leasing installments is advantageous. 

LeasingPilot, as an independent consulting and brokerage platform, has set itself the goal of providing you with comprehensive and transparent information to enable you to make a conscious decision in favor of the financing forms of leasing or installment plan and to support you in your search and selection of the right leasing offer for your project.

The starting point for the following explanations is a "lease conforming" leasing, in which the leasing company balances and depreciates the asset, while the lessee only books the leasing rates as expenses. This is to be compared to a loan-financed purchase, where the buyer claims the financing costs and depreciation on the asset. Lease purchase is treated the same as loan-financed purchase.

The short summary is:

  1. In 2009, leasing lost its best-known tax advantage over loans in the trade tax addition (since then, there has even been more of a minor disadvantage in this respect).
  2. However, one tax advantage of leasing is that, depending on the depreciation period of the asset and the installment structure, there may be an advance effect, i.e. earlier tax recognition of the investment expenses, i.e. you can claim tax expenses in the form of the leasing installments earlier than alternatively the interest and the depreciation on the asset in total.  The advantage is therefore not the "full" tax deductibility of leasing installments (this also applies to depreciation and interest), but the - depending on the structuring - earlier assertion, which leads to a present value advantage for you as the customer. 
  3. If the interest barrier applies (e.g. in the case of LBOs), leasing offers clear tax advantages, as the deductibility of leasing installments is not restricted.

Thus, there are no longer always applicable tax advantages, but tax optimization is achievable through structuring or in situations such as the interest barrier. The starting point for the explanations is "estate-compliant" leasing, in which the leasing company accounts for and depreciates the asset, while the lessee merely books the leasing installments as an expense. This is to be compared to a loan-financed purchase, where the buyer claims the financing costs and depreciation on the asset. Lease purchase is treated the same as loan-financed purchase.

LeasingPilot recommendation
If you are interested in bringing forward the tax consideration of investment expenses (especially for assets with a long depreciation period), we will be happy to advise you on the possibilities. In this case, agreeing on higher initial installments (declining balance installments) can also have interesting effects. Due to the jurisdiction of the Federal Fiscal Court, there are quite generous possibilities for movables leasing. If the interest barrier is applicable, leasing has convincing tax advantages. LeasingPilot advises you as a reasonable partner.

To these three addressed topics in detail:

1. Trade tax addition

In principle, interest and depreciation, like leasing installments, can be fully claimed for corporate or income tax purposes; for trade tax purposes, a portion of the interest and leasing installments is added back, so that the deduction is not fully possible. This trade tax addition of interest or leasing installments only applies to the amount that exceeds the exemption amount of EUR 200,000 (for further details, please refer to the legal text of § 8 GewStG).

Then interest can only be claimed for trade tax purposes at 75%, (addition 25%), leasing installments only at 95% (addition 25% of 20%).

What seems to be in favor of leasing at first glance, however, is a disadvantage of leasing especially in low-interest phases, since the financing share is set too high in most cases due to the lump sum.

However, this disadvantage is generally not serious and should not have a decisive influence on the decision for or against leasing as a form of financing. 

2. Early consideration of the tax expense

As indicated, it is possible for the lessee to claim higher tax expenses in the form of full deduction of the leasing installments earlier than if, as in the case of a loan-financed purchase or hire-purchase, the lessee were to account for the asset itself, depreciate it and additionally claim the financing interest. This depends on the individual case, as it depends on the useful life to be applied in the individual case (the official depreciation tables are only guidelines) and the applicable depreciation rules such as declining balance or special depreciation. Also, public subsidy programs such as investment grants, etc. often require economic ownership by the customer, so that only purchase or lease-purchase can be considered.

There is also the possibility of agreeing initially higher leasing rates in order to bring forward the actual and thus also the tax expenditure in time. In principle, many leasing companies offer the option of freely agreeing installment progressions. Seasonal or declining installments are not uncommon.

In the case of degressive installments, i.e. initially increased installments, the German Federal Fiscal Court has ruled that, depending on the initial loss in value of the leased asset, leasing installments that have increased significantly in the initial years are also recognized for tax purposes (BFH, ruling dated February 28, 2001, I R 51/00).

LeasingPilot recommendation
LeasingPilot will be happy to advise you on the possibility of agreeing different installment schedules.
However, please do not lose sight of the essentials, such as the total financing costs, in all tax considerations. LeasingPilot calculates the effective interest rate for each individual offer. You can also use LeasingPilot's leasing calculator to determine this yourself.

3. Consideration under the interest barrier

The interest barrier limits the deductibility of interest expenses to 30% of the taxable EBITDA if the exemption limit of 3 million net interest expenses (interest expenses - interest income) p.a. is exceeded; the remaining amount can be carried forward as an interest carryforward and offset in later years.

However, leasing in conformity with the decree does not constitute a transfer of capital but a transfer of use and is therefore not covered by the interest barrier (see BMF letter on the interest barrier (§ 4 h EStG; § 8 a KStG) of July 4, 2008, paragraphs 15, 25).

LeasingPilot recommendation
In practice, almost only companies in restructuring or reorganization situations or companies with intentionally high external debt (LBO, MBO, MBI) suffer from the interest barrier.

In these situations, the addition of lease financing can be highly attractive. We will be happy to advise you on the possibilities.

Author:  Attorney, tax advisor Stefan Sovinz (Head of Structuring at

How do leasing and hire-purchase agreements fit in with financial covenants?

Leasing and hire-purchase are generally regarded as financing solutions for SMEs - they can also bring their advantages to bear in combination with structured financing agreements, e.g. in the case of an LBO.

There are 3 prerequisites for this:

1. the basic question is whether the financing agreements permit leasing and/or hire purchase. This is regulated in the "Reps and Warranties" section of the "Permitted Financial Indebtedness". There is almost always a provision allowing leasing (and hire-purchase) up to a certain maximum amount ("basket").

2. Not to be neglected are the effects on the financial covenants, the calculation of which of course depends crucially on the relevant accounting under HGB, IFRS or others. 

Under HGB, for example, let's look at the EBITDA/net debt ratio ("senior leverage") and the equity ratio ("net worth"): Under HGB, hire-purchase is equivalent to an (additional) loan, i.e. the balance sheet is extended by the property and the hire-purchase liability, and the interest and depreciation on the property are recognised in the income statement. Therefore, the equity ratio and the gearing ratio decrease insofar as the net financial liabilities increase. 

If one chooses leasing, one can use the "off-balance sheet" effect under HGB: the balance sheet remains unchanged, in the P&L the EBITDA is reduced by the leasing rates, which represent other operating expenses. 

Now the question arises as to which variant is more advantageous. 

The short answer is: the longer the leasing term and the higher the residual value, the lower the leasing instalment, which at a certain point has an advantageous effect on the debt-equity ratio. The better equity ratio is an additional argument.     

However, the decisive factors should always be the choice of a reasonable financing partner, the appropriate type of contract and, last but not least, the financing costs. Diversification of financing sources is absolutely advantageous and structured loan financing is no reason not to consider leasing or hire purchase. If the interest barrier is still an issue, the tax deductibility clearly speaks in favour of leasing. 

LeasingPilot will be happy to advise you on the possibilities!  


Maintenance costs Part of the leasing rate within the meaning of Sec. 8 No. 1 German Trade Tax Act (GewStG)

In a recently published ruling, the BFH (ruling dated October 20, 2022, file no. III R 33/21) for the first time commented on the interpretation of the term "leasing rates" for the purposes of the trade tax addition pursuant to Sec. 8 No. 1 d) German Trade tax act (GewStG): "Leasing rates" are to be understood in the same economic sense as rental and lease payments.

In the case decided, this meant that maintenance costs passed on to the lessee, which the lessee had to pay to the lessor in addition to the leasing rates, were subject to trade tax addition for the lessee within the meaning of Section 8 No. 1 d) GewStG.

LeasingPilot recommendation
In finance leases, maintenance is usually passed on to the lessee and contracted out by the lessee to third parties. The ruling concerns the case where maintenance is provided by the lessor. In this case, according to the BFH, the additional maintenance costs borne by the lessee are subject to the trade tax addition in the same way as if the maintenance were included in the lease payments. If necessary, it could be a solution in these cases to regulate the maintenance by the lessor by means of a separate maintenance contract at third-party conditions.  

(Attorneys, tax advisors Stefan Sovinz, Holger Bachmann)

To the full text of the ruling


The information provided can, by its nature, be neither all-encompassing nor tailored to the specific needs of a particular individual case. It does not constitute advice, any other form of legally binding information or a legally binding offer on our part. Over time, changes occur in tax laws, administrative directives, the interpretation of these legal sources and in case law. Such changes may affect the validity of the statements in the Library. Although we try to keep the library up to date, we are not obliged to point out changes in the legal assessment of topics covered in the library. We do not warrant or guarantee the accuracy or completeness of the contents.  The statements in the library do not replace legal or tax advice and are for general information purposes only.


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Stefan Sovinz

Your leasing adviser