Understanding Leasing Contracts: Features and Benefits
Leasing Contracts
Functions
- This contract allows for the purchase of goods, but it is not a sale.
- It provides funding for the employer.
- It offers tax benefits.
Legal Regulation
Our legislation addresses leasing. It is considered an atypical contract, but it is referenced in various laws. The law governing credit institutions provides a concept, and the law of 29.7.1988 assigned social benefits in its seventh additional provision. The corporate tax law of December 27, 1995, Article 128, was partially modified by the Act. The law of hire purchase of Movable Property of July 13, 1998, differs from lease-purchase (Article 5). However, this lease may be registered in the Register of Hire Purchase of Property (Art. 15, 1st additional provision of the Installment Sales Act) to be created.
Parties Involved
The contract involves two main parties:
- The leasing company (lessor): These must be leasing companies, banks, savings banks, or credit unions.
- The user: This must be a business person or professional who uses the property for their own activity.
However, three subjects are connected:
- The leasing company.
- The user.
- The vendor or the right.
The user chooses an asset. The leasing company buys it but does not use it; instead, it cedes its use to the user. The user utilizes the good and pays rent to the company that owns the property. When the agreed-upon timeout period in the contract ends, the user can buy the property by exercising a purchase option. The contract also provides for the purchase and the price the user must pay for it.
These contracts have a minimum duration of two years if they concern movable property and ten years if they concern real estate or industrial establishments.
Characteristics and Nature of the Contract
This contract has complex notes that resemble a purchase, a lease, or a loan.
Resemblance to an Installment Sale
- Because the user can acquire the asset at the end of the contract term.
- Because if the user purchases on arrival by the agreed deadline, they would have effectively paid the same as if they had concluded a purchase agreement.
- The sum of all fees to be paid + the price of the call option price = good + term interest deferred.
- Because if this contract is the subject of hidden faults or defects, it is the user who demands, not the leasing company, which is really who bought the property. This is so because in the leasing contract, the purchaser’s own shares have been assigned to the user.
Resemblance to a Lease
Because, just as in other leases, the owner of a property (the leasing company) gives its use to another (the user) in exchange for rent payments.
Resemblance to Credit
It also has some characteristics of credit. If the user exercises the option, they would have paid the leasing company the price of the goods plus interest for delayed payment (adding the amount of income and the price of the option). Therefore, if the user exercises the option, the leasing company has granted the user credit for the purchase of the property.
Why might a user agree to a lease contract instead of a hire-purchase or applying for a bank loan?
From what has been said so far, it appears that ultimately the user charge would be similar if you perform any of these contracts.
The advantage of leasing for a user lies in the tax benefits, as the user may reduce their personal taxes (income tax or corporation tax) by a portion of the fees they must pay to the leasing company.