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.