Financial or operational leasing: which is right for you?
If you have the option to lease a vehicle, that’s great news! But should you choose financial or operational leasing? What features do these two types of product offer? myLIFE met the experts with all the answers.
Many companies in Luxembourg have remuneration policies that include benefits in kind (meal vouchers, company cars, private pension scheme contributions, etc.). In 2018*, no less than 26% of employees living in Luxembourg received some form of benefit in kind, and of those 8% had a company car they could use outside of work. In fact, cars were the most common benefit available to executives and directors in the Grand Duchy.
Every organisation draws up its own policy on company vehicles. A CEO’s decision to opt for operational and/or financial leasing will depend on their goals and HR policies (category of employees eligible, conditions of access, etc.).
So, how do operational and financial leasing actually differ? Let’s scratch beneath the surface to explore the features of these two types of product.
Operational leasing is an “all-inclusive” product. The beneficiary’s monthly lease payment entitles them to use the vehicle for a set period of time during which all charges are covered.
An all-inclusive service… with limits
An employee with an operational lease can use their vehicle for professional and private travel for the duration of the agreement. The lease covers the vehicle and associated charges such as the rental and financial depreciation of the vehicle, comprehensive (“Casco”) insurance, circulation tax and breakdown assistance. Some agreements may cover tyres, maintenance, repairs and even fuel.
This type of product offers a certain degree of peace of mind, but users are also bound by specific terms. For instance, penalty charges will apply if they terminate the lease early or exceed the maximum mileage authorised in the agreement.
Plus, the fact that they don’t own the vehicle means that they can’t make any changes to it (such as tuning) and must use it with due prudence. The lessee can be charged for any damage not considered normal wear and tear (which generally depends on the age and mileage of the vehicle); they may also be expected to pay cleaning fees.
In principle, there is no option to purchase the vehicle at the end of the agreement
In principle, there is no option to purchase the vehicle at the end of an operational lease agreement. At the end of the agreement, the vehicle is returned to the lessor for sale on the second-hand car market.
If you choose operational leasing, the vehicle and associated charges will be covered but there will be no automatic option to purchase the vehicle at the end of the agreement.
Remember: the lessee must make fixed lease payments. These depend on the term of the agreement and the mileage and services offered. The monthly payments on an operational lease also depend on the vehicle’s estimated resale value, which reflects the reputation of the manufacturer and the car’s specs, among other factors.
|Leased vehicles and Belgian cross-border workers
“If a Belgian cross-border worker with a foreign lease agreement is stopped by the Belgian authorities within Belgium, they must produce their employment contract and the vehicle provision agreement signed by their employer. We recommend that you keep these in the vehicle at all times,” says Olivier Wuilmus, Fleet Manager at BIL Lease. “Also,” he continues, “for your spouse to drive your leased car, they must now be able to show the authorities a household composition certificate upon request.”
These requirements do not apply to German or French cross-border workers.
A financial lease agreement comes with an option to purchase the vehicle at the end of the lease. The beneficiary’s lease payment entitles them to a vehicle that they can use for all of their journeys over a set period of time.
This is a financial product, so none of the ancillary services offered under an operational lease are included. The lease payment amount covers the financial depreciation of the vehicle, financial charges and sometimes insurance. It reflects the value of the asset and doesn’t take mileage into account.
Purchasing terms and conditions
A financial lease comes with the option to purchase the vehicle at the end of the agreement. The client has to pay the residual value of the vehicle, which theoretically equates to 10% of the initial investment.
“The client knows how much the vehicle will cost to buy from the outset,” stresses Charlotte Lies, Director of BIL Lease. “Let’s suppose that the client chooses a vehicle that costs €50,000 before VAT. The residual value at the end of the agreement will be €5,000. The client then has two options:
- to buy the vehicle for 10% of its value (€5,000 + VAT);
- to extend the lease until the vehicle depreciates entirely. The client will then become the owner of the vehicle after the final lease payment is made.”
N.B.: if the beneficiary purchases their company car at the end of the financial lease, they will be taxed on the benefit in kind resulting from the difference between the market value of the vehicle (determined by the Luxembourg tax authorities (ACD)) and the purchase price. The tax authorities normally produce a flat-rate estimate of the market value based on the term of the lease, the initial investment value and the duration of the agreement.
A financial lease agreement comes with an option to purchase the vehicle at the end of the lease.
How is the employee’s benefit in kind calculated?
The monthly budget allocated to the beneficiary of a leased car (under an operational or a financial lease) is part of their salary. It is therefore taxed on a monthly basis along with their salary.
Until 2017, the benefit was calculated as 1.5% of the value of the vehicle, inclusive of tax (options and VAT included and after any trade discount was applied). Since that time, this rate has changed as a result of the tax reform. It now depends on the vehicle’s CO2 emissions and ranges from 0.5% for those with the lowest emissions (0 g/km) to 1.8% for those with the highest (over 150 g/km).
For example, this means that the benefit in kind on a diesel vehicle costing €39,000 with emissions of 140 g/km is calculated as 1.5% of the vehicle’s value after tax: 1.5% x €39,000 = €585.
A benefit in kind of €585 is therefore added to the employee’s monthly salary 12 times and taxed accordingly.
Lastly, on 1 January 2019, the government introduced premiums based on the CO2 emissions of the vehicle: “If you buy a vehicle with CO2 emissions between 0 g/km and 50 g/km, the government pays a premium of €2,500,” explains Mr Wuilmus. “This premium rises now to €8,000 for vehicles that are fully electric with 0% CO2 emissions.”
While the lease agreements discussed above are entered into by a lessor and a company who then provide certain employees with a vehicle, another type of leasing is also gaining ground in the Grand Duchy: private leasing.
This type of lease is specifically aimed at private individuals who live in Luxembourg. A private lease works like an operational lease: the lease payment entitles the beneficiary to a car and all charges are covered subject to certain conditions (term of the agreement, mileage, usage, etc.).
With this type of lease you won’t have to worry about the upkeep of your vehicle, but it’s important to remember that a leased car doesn’t belong to you. This means that you can’t rely on the value of your vehicle if you fall on hard times and you will have to honour your agreement regardless of the circumstances.
*Results of the EU-SILC survey, picked up by STATEC: One in four employees gets benefits in kind, but their weight in the payroll is marginal.