What is leasing and what does this term mean on a financial and economic level? Here’s everything you need to know, including features and benefits.
More and more often we hear about leasing contract, an operation that allows you to obtain goods on "loan", upon payment of fees. Compared to a normal rental, it stands out because it provides a final purchase option against a residual price.
What are the peculiarities of this contract? How does it work?
Here are all the main features of leasing.
What is leasing: meaning and definition
leasing is a contract by which one party attributes to the other the enjoyment of an asset for a determined period against the payment of periodic rents with option for the purchase of the goods after the contract.
Naturally, to obtain ownership of the asset it is necessary to pay a residual amount.
If we wanted to adopt a phrase in Italian that could intuitively make it clear what the content of the contract is, we would talk about lease with option for final purchase. Leasing is currently regulated by law 124 of 2017, paragraphs 136-140, article 1.
The legislation provides for termination of the contract in the event of a serious breach, consisting in the failure to pay 6 monthly or two quarterly installments in the case of real estate leasing and 4 monthly installments, or two quarterly in other types of leasing (paragraph 137).
It is important to outline the peculiarities of leasing because, in the context of aid to businesses, concessions are not always provided for leasing contracts, for example, the Nuova Sabatini is also applicable to contracts leasing, but other measures do not provide for this extension and recognize benefits only for the purchase of new machinery.
What are the peculiarities of this contract and the regulatory framework?
Why stipulate a leasing contract? Anyone who has a business knows it well: technological progress is constant, you may buy a cutting-edge machine and after a few years realize that it is now obsolete, in the meantime you are still paying the installments. Leasing does not give rise to this problem, which is precisely why it is widely used in the leasing of electro-medical machinery.
A clarification is needed, what happens if in the meantime the machinery breaks down? In this case, the burden is on the user who will have to return the machinery, or whatever the leased asset is, at the end of the contract, in the conditions in which he received it and therefore in working order. extraordinary maintenance therefore remains the responsibility of the user.
The ordinary maintenance of the goods remains the responsibility of the user. Normal obsolescence is, however, a risk that falls on the owner.
We must remember that leasing can include different formulas, for example, there is often a maxi initial fee which corresponds to 20%-25% of the price of the asset.
From a fiscal point of view, the asset remains in the assets of the balance sheet of the grantor, it follows that the user will not be able to register it among the fixed assets, but records the commitment undertaken contractually in the memorandum accounts: leased assets (give) to leasing company commitment account (credit). In the income statement it accounts for the fees resulting from the invoices received.
The leasing fee is deductible and therefore appears among the costs, except in the case in which the entrepreneur has joined the flat-rate scheme which does not provide for the analytical deduction of the costs incurred for the business activity. If the asset is for mixed use, for example, the company car, the leasing fee can only be partially deducted.
Leasing, who is it aimed at?
In which fields is it convenient to stipulate a leasing contract? Let’s say right away that there are so many, above all they are contracts in favor of companies in which technological innovation has a strong impact.
It was said before that this is a widely used contract for the electro-medical sector. The example is easy to give, it is a field of continuous innovation, let’s look at a company That machine will certainly have a high cost and few will be able to afford to have it, but it is still a very useful device that can attract a large audience of patients.
On the other hand, in a short time the same technology could be overtaken by a new one, the risk is that of making a very high investment and not being able to recoup the expenses incurred due to the overcoming of the same technology. In this case, leasing is an excellent alternative also because it frees from any disposal costs.
Similar discussions can be made in many other sectors, for example, that of 3D printing, or in production processes which can be speeded up or in any case made more efficient with the use of innovative technology.
How financial leasing works
The basic structure of the contract is bilateral, but we can have further situations, i.e. in the scheme seen, there are two subjects, grantor and user. In most cases, however, this scheme does not work well because for the owner of the asset, for example, the producer of the asset, the machinery has cost for production and research and needs liquidity.
What happens in these cases? Most of the time we end up with a financial leasing. In this case, the manufacturer sells the machinery to the bank upon payment of the price, and the bank (financial company or leasing company) leases it to the user.
We are therefore in a trilateral relationship which is naturally more complex because the bank receives the financing proposal from the person who would like to use the machinery and must naturally evaluate the convenience of this operation.
In this case, the leasing contract is only between the grantor (bank) and the user, the latter will pay the rental fees to the bank, and there are no relationships between the user and the supplier of the asset.
The advantages of leasing
The advantages of leasing are numerous, first of all, the lessee can obtain essential capital goods for the company without having to purchase the property and therefore without losing liquidity which can be easily used for other activities corporate. Secondly, there is the deductibility of expenses incurred for the rent. The fee can be deducted for Ires and Irap purposes.
From a fiscal point of view, there are also advantages regarding VAT. The Value Added Tax is fractionated on the periodic rents and is not fixed at the time of purchase of the asset, generating thus greater liquidity.
There is also the possibility of obtaining contributions provided for companies that innovate for leased assets, for example, Nuova Sabatini.
Finally, at the end of the leasing contract, there remains the possibility of purchasing the asset for a residual price; naturally, the evaluation will be made taking into consideration the usefulness of the product concerning the company’s needs at the moment in which the option is exercised.
The risks of leasing
Of course, every contract has advantages and disadvantages, but what are the disadvantages or risks of leasing? Firstly, it’s important to note that in financial leasing, the asset remains the property of the bank, while in bilateral leasing, it remains the property of the supplier. However, the user is responsible for the costs of ordinary maintenance.
The user is also responsible for the costs relating to any extraordinary maintenance, necessary, for example, in the event of a breakdown.
Naturally, those who make the asset available with a leasing contract do so to have an economic income, this means that generally the amount of fees foreseen for the duration of the contract is quite high and must amortize the cost of purchase of the good or the value of the good itself.
Original article published on Money.it Italy 2024-05-29 09:12:00. Original title: Cosa significa leasing e come funziona
