Financial Lease on the Balance Sheet: Accounting Explained

Economic Ownership and the Balance Sheet

When entering into a financial lease agreement, you acquire the economic ownership of the vehicle. Legal ownership remains with the leasing company throughout the term until the final payment is settled. This distinction is crucial for your accounting.

Because the vehicle is part of your company's assets, you capitalise the acquisition value (excluding VAT) on the asset side of the balance sheet. On the liabilities side, the corresponding financial obligation is shown as a long-term debt.

Tax Depreciation and Interest Deductibility

Since the vehicle is on your balance sheet, you are allowed to depreciate it annually. These depreciation costs reduce your company's profit, which can be advantageous for income tax or corporation tax purposes. In addition, the monthly interest costs of the lease agreement are tax-deductible as business expenses.

Depending on the situation, you may also be entitled to additional investment schemes. For detailed conditions on investing and tax benefits, you can always consult the current regulations of the Dutch Tax and Customs Administration (Belastingdienst) or your accountant.

Processing in the Administration

The administrative processing of financial lease requires you to split the monthly payment into a principal repayment portion and an interest portion. The principal repayment reduces the debt on the balance sheet, while the interest is directly recorded in the profit and loss account as a financial expense.

It is advisable to carefully check that the residual debt on the balance sheet matches the repayment schedule of the financing when preparing the annual accounts.

How Does Financial Lease Affect Liquidity and Solvency?

Financial lease is capitalised on the balance sheet as an asset, with a corresponding debt. This impacts a company's financial ratios. The debt affects solvency, which is the ratio between equity and debt. Higher debt can lower the solvency ratio, which may be seen as an increased risk by potential financiers or investors. It is essential to monitor and communicate this change in financial structure effectively.

Regarding liquidity, financial lease affects it through periodic lease payments. While the acquisition of the asset does not require a large immediate cash outflow, monthly instalments are paid. These instalments include principal repayment and interest. It is important to ensure that the company's cash flow is sufficient to meet these obligations, thereby maintaining healthy operational liquidity.

• Affects the ratio of equity and debt
• Impacts the solvency ratio
• Fixed monthly payments affect cash flow
• Requires planning for liquidity management

When is Financial Lease Tax-Advantageous?

Financial lease can be tax-advantageous due to the possibility of interest deduction and depreciation. The interest paid on the lease instalments is tax-deductible as a business expense. Furthermore, the company has the right to depreciate the asset, which is after all economically owned. These depreciations reduce the taxable profit, resulting in lower corporation tax or income tax payable, depending on the legal form of the company. This tax benefit makes financial lease an attractive form of financing.

In addition to direct deductions, businesses may qualify for investment deduction schemes, such as the Small-Scale Investment Allowance (Kleinschaligheidsinvesteringsaftrek - KIA), Energy Investment Allowance (energie-investeringsaftrek - EIA), or Environmental Investment Allowance (milieu-investeringsaftrek - MIA). This is possible because the lessee is the economic owner of the asset. These deduction opportunities can significantly increase the total tax benefit and reduce net investment costs, further easing the financing burden.

Frequently asked questions