If you carry out a VAT-exempt activity, you are more interested in taking a lease or a loan
Your company carries out an exempt activity that does not entitle you to deduct the VAT you incur. Well, if you are going to finance the purchase of a new asset, what suits you more: formalise a loan or a ‘leasing’?
Activity exempt from VAT
Asset financing
Your company carries out an activity that does not entitle you to deduct the VAT you bear (this can happen, for example, if you provide certain medical, cultural or educational services or if you are dedicated to the rental of housing), so this tax represents a higher cost of the goods and services acquired for your business.
If you decide to acquire a new asset and need to finance the purchase,
What suits you best: formalise a loan or a lease?
What is the option with which you will bear less VAT and interest costs?
Similar costs between leasing or loan
Well, if your company cannot deduct VAT, both alternatives have similar total costs:
- Loan. If you apply for a loan, you must purchase the asset from the supplier and the supplier will pass on the VAT on the price (which, in general, will involve an extra cost of 21%).
In this case, the bank must also finance the VAT, which will increase the interest to be paid.
- Leasing. If you apply for a lease, on the other hand, it is the bank that will buy the asset (in general, deducting all the VAT incurred). And he will finance the price of the good without VAT, so your company will pay less interest.
However, the bank will pass on VAT on all leasing installments, so you will end up paying said tax also on interest and not only on the principal (the total costs for interest and VAT of the lease are equalised with those of the loan).
Leasing or loan comparison
Your company is going to acquire a new asset with a total cost of 100,000 euros plus 21% VAT:
- Loan. Apply for a loan of 121,000 euros (100,000 euros plus VAT) to be repaid within five years, at 5% interest.
- Leasing. It formalises a lease for 100,000 euros for five years, at the same interest rate.
| Year | Loan | Leasing | |||
| Ppal. | Interest | Ppal. | Interest | VAT | |
| 1 | 21.847 | 5.554 | 18.055 | 4.590 | 4.755 |
| 2 | 22.965 | 4.436 | 18.979 | 3.666 | 4.755 |
| 3 | 24.140 | 3.261 | 19.950 | 2.695 | 4.755 |
| 4 | 25.375 | 2.026 | 20.971 | 1.674 | 4.755 |
| 5 | 26.673 | 728 | 22.045 | 600 | 4.755 |
| Payments | 121.000 | 16.005 | 100.000 | 13.225 | 23.780 |
| Total | 137.005 (1) (2) | 137.005 (1) (2) | |||
The total cost of the asset (VAT and interest included) ends up being the same regardless of the way it is financed.
Although with the loan you support a lower VAT and it seems that it is the least expensive option (since your company cannot deduct this tax), you will have to satisfy higher interest than with the ‘leasing’, which balances both alternatives.
Other important factors
What suits you best? A Leasing or a loan
Taking into account the above, to decide which option is the best you must analyse other factors. For example:
- If you apply for a loan, it is likely that the bank will ask you to constitute a guarantee of payment, which will involve additional costs. With leasing, on the other hand, the asset itself (being owned by the bank) can serve as a guarantee.
- On the other hand, with leasing you will be able to amortise the asset more quickly and defer the payment of the Corporate Tax (IS), since you will be able to benefit from the special leasing regime.
- On the other hand, formalising a loan and acquiring the asset in ownership will facilitate the sales procedures in case you decide to sell it before you have finished repaying the credit.
In conclusion
Although a priori formalising a loan seems the best option – since the VAT incurred is lower – this is compensated by the lower interests of the ‘leasing’.
Therefore, other factors must also be analysed, such as the cost of guarantees.
