Finance Lease: key tax advantages
Finance leasing, commonly known as leasing, has become a strategic financial tool for businesses looking to acquire capital goods without compromising their liquidity. This instrument not only facilitates financing but also offers significant tax benefits—particularly in the real estate sector.
What is a Finance Lease?
A finance lease is a contractual arrangement whereby a financial institution acquires an asset and grants its use to a company or entrepreneur for a specified period. At the end of the lease term, the lessee has the option to acquire the asset for a pre-agreed residual value. This structure allows up to 100% financing of the asset’s value, including VAT, thereby reducing bank indebtedness and enhancing the company’s investment capacity.
How does it differ from Operating Lease (Renting) or Leaseback Agreements?
Operating lease (renting) is an agreement primarily aimed at temporary use of assets, usually without the intention of ownership. Unlike leasing, renting typically includes additional services such as maintenance, insurance, and technical support, making it an attractive option for companies looking to outsource asset management.
Leaseback (or sale and leaseback) is a hybrid arrangement that allows companies to release liquidity without losing use of the asset. A business sells an owned asset to a financial institution and simultaneously leases it back via a finance lease. This provides immediate cash while retaining operational control, with the possibility of repurchasing the asset at the end of the lease.
What are the tax advantages of Finance Leasing?
1. Accelerated Depreciation
Although the lessee does not hold legal ownership during the lease term, they are considered the accounting owner and must recognise the asset on the balance sheet and apply the relevant depreciation.
One of the key tax benefits is the option to apply accelerated depreciation. Under Article 106 of the Spanish Corporate Income Tax Act (LIS), the portion of lease payments corresponding to asset cost recovery is tax-deductible up to twice the standard linear depreciation rate prescribed in the official tables. For small and medium-sized enterprises (SMEs), this limit increases to three times the standard rate.
This deduction allows companies to significantly reduce their taxable base in the early years of the lease, thus optimising their tax burden.
It is important to note, however, that this tax treatment is ultimately neutral: early-year negative adjustments that reduce the tax base will eventually reverse through corresponding positive adjustments in later periods.
2. Deductibility of Finance Charges
The interest element of lease payments is deductible as a financial expense for corporate income tax purposes. This deduction is generally unrestricted, providing a substantial tax relief for businesses.
3. Deferred VAT Payments
In leasing transactions, the VAT applicable to the acquisition of the asset is paid in instalments through the periodic lease payments. This enables the business to defer VAT payments, improving cash flow and facilitating financial planning.
What conditions must be met to access these tax benefits?
As noted, one of the most valuable tax advantages of finance leasing lies in its treatment under direct taxation.
To apply the special regime set out in Article 106 of the Corporate Income Tax Act—and to benefit from the related tax relief—the following conditions must be met:
Minimum term: The contract must run for at least 2 years for movable property and 10 years for immovable property.
Lessor status: The lessor must be a credit institution or financial establishment.
Exclusive use: The asset must be used exclusively for business purposes.
Purchase option: The agreement must include a purchase option at the end of the lease term.
Payment breakdown: Lease payments must clearly distinguish between capital repayment and finance charges.
Progressive repayment: The portion of payments allocated to asset cost recovery must be equal or increasing throughout the lease term.
Additional considerations
Early termination: Cancelling the lease early may result in penalties and the obligation to reimburse tax deductions previously claimed.
Limitations: Land and plots are not depreciable assets; hence, the portion of lease payments relating to these elements cannot be deducted for tax purposes.
Finance leasing offers Spanish businesses an effective solution for acquiring both movable and immovable assets, with considerable tax advantages that can optimise their tax burden and improve financial management. However, strict compliance with the legal requirements is essential in order to fully benefit from these incentives.
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