Basic Definition of Leasing

Leasing represents a special form of firstly medium-term and long-term financing of legal and natural persons and its main characteristic is to use, and not to be an owner of the financing item.

In economic sense, leasing represents a package of services that provides the lessee with quality disposal of financing item during a certain period of time.

As a modern form of financing, leasing has significant privileges and advantages as opposed to classic forms of financing.


Types of Leasing

The essence of operating lease is not about acquiring property and that is why it is more apt for category of potential users that do not want to burden their business in balance sheets. That is why it is also called business lease.

The costs of lease usually do not reach the value of leased asset, while the lease itself ceases to apply before the end of useful life of leased asset, regardless of whether the asset is returned to the lessor (operating lease) or in case of buyout (finance lease).

Due to fact that the lease is usually not shown as an asset in the balance sheet, it is also called hidden debt.  Deposit is often mentioned in operating lease and it represents an item of long-term receivables that is registered in lessee’s books and does not represent an operating cost or inclusion of VAT provisions.

It is common that in standard provisions the deposit makes 20% of the financing item value without VAT and it is also equal to predictable value after the lease expiration.

In accordance with the Leasing Law and Tax Law the deposit cannot surpass 1/3 of the leasing item value. Everything beyond 1/3 of the value of aforementioned amount is considered to be a purchase and does not represent a business lease.

In case of action sales and excellent creditworthiness, the deposit can be lower or replaced with the bank guarantee of first class banks.

The use of financing asset without acquiring ownership.
The lessor deducts the financing asset from his books.
The contract is concluded to a period from 12 to 72 months depending on the financing asset.
Monthly installments belong to expense, while VAT belongs to pretax.
The possibility of buyout is not specified in contract.
After the lease-end the financing asset is returned and the new one is taken.

Finance lease is similar to hire purchase or installment payment. At the beginning, the lessee is given an R-1 invoice on his/her name which holds the entire amount of VAT. The financing asset is deducted from lessee’s books, but not from lessor’s books.

When we are dealing with legal persons (Inc., Ltd., craftsmen who issue R-1 invoice and others who issue R-1 invoices), the lessee has the option at the beginning, in accordance with legal provisions, to perform complete VAT return.

The lessee, with the aforementioned R-1 invoice, is also getting monthly charges that comprise the amount of monthly installments. After the payment of all monthly installments, the lessee, by paying in redemption value of €150 (standard offer), becomes the owner of the financing asset.

In finance lease the down payment represents the operating expense. It is common that in standard provisions the down payment comprises 20% of financing item value with VAT, while after the payout of all installments there is a buyout in value of €150.

In case of action sales and excellent creditworthiness the down payment can be lower or replaced with the bank guarantee of first class banks.

In accordance with Leasing Law and Tax Law there are no provisions on the amount of down payment. Therefore, in any case it is possible to calculate monthly charges that are acceptable for the lessee.

 Main purpose: acquisition of ownership.
 Leasing object is deducted from the lessee’s books.
 The contract is concluded to a period from 12 to 72 months and longer depending on the financing item.
 Only a part of monthly installment (interest rates) belongs to expense.
 The buyout is specified in the contract.