Leasing involves three parties: the user company (the lessee), the leasing company (the lessor) and the asset supplier.
The process is as follows:
The benefit: financing equipment without upfront capital and without tying up cash, while retaining the option to become the owner.
Under French accounting rules (PCG), a finance lease is treated as a lease, not an acquisition. The asset does not appear on the lessee’s balance sheet until the purchase option is exercised.
Accounting entry for a finance lease payment (monthly instalment €500 ex-VAT, VAT 20%):
The asset remains on the lessor’s balance sheet, not the lessee’s: this is known as off-balance-sheet financing for the lessee.
When the purchase option is exercised (residual value €1,000 ex-VAT): the asset is then capitalised as a fixed asset (class 2 account) and begins to be depreciated over its remaining useful life.
This treatment differs from IFRS 16, which requires the recognition of a right-of-use asset and a corresponding liability. For financial analysis, a restatement of finance leases is often performed to compare companies on a consistent basis.
A finance lease is naturally compared to a bank loan financing the same asset.
| Criteria | Finance lease | Loan |
|---|---|---|
| Initial ownership | Lessor | Company |
| Upfront payment | Often none | Often required |
| Balance sheet recognition (PCG) | Off-balance-sheet | Asset + liability |
| Deduction | Instalments as expenses | Depreciation + interest |
| Exit flexibility | Possible return | Asset to resell |
Numerical example: an SME finances a machine costing €24,000 ex-VAT via a 48-month finance lease, with monthly payments of €550 and a purchase option of €600 at the end. Total cost of ownership: (550 × 48) + 600 = €27,000 ex-VAT. The €3,000 premium reflects the lessor’s margin—offset by the lack of upfront payment and preserved cash flow. Accounting software like Orizen automatically records instalments as expenses and reminds you of the purchase option deadline, often overlooked at contract end.
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Essai gratuit 14 jours What the Orizen accounting software module costsA PCP (Personal Contract Purchase) is the consumer/vehicle equivalent of a finance lease. The mechanism is the same: lease followed by a purchase option at a residual value. The term "finance lease" is used for professional assets (furniture or property) governed by the French Monetary and Financial Code, while "PCP" mainly refers to car contracts for individuals.
Under French accounting rules (PCG), no: the asset remains on the lessor’s balance sheet, and the lessee only records the instalments as expenses. This is off-balance-sheet financing. However, finance lease commitments are disclosed in the notes, and IFRS 16 requires the recognition of a right-of-use asset and a liability on the balance sheet.
Yes, VAT on finance lease payments is generally deductible under standard conditions, depending on the nature of the asset. Note the exceptions and restrictions: for example, VAT on passenger cars is usually non-deductible, whether the financing is via purchase or finance lease. Check the rules applicable to the asset in question.