Leasing contracts usually contain agreements according to which contractually agreed payments may be due at the end of a leasing contract. This is the case, for example, if the vehicle
- is returned prematurely or
- if the vehicle is returned in a condition not in accordance with the contract.
The payments to be made may therefore be non-taxable compensation for damages or an additional usage fee or a reduction in the usage fee.
Practical example:
An entrepreneur has suffered a total loss with his leased company car. His insurance covers the damage or depreciation that has occurred to the vehicle. However, the entrepreneur must pay compensation for the premature termination of the leasing contract. This means that he pays the leasing company an additional €1,500 as compensation for future leasing installments. This payment is to be regarded as genuine compensation and is therefore not subject to VAT.
Other payments on termination of a lease
If a leasing contract for a company vehicle is terminated by returning the vehicle without making any further payments, no tax problems arise. However, if payments are to be made upon termination of the leasing contract, the nature of these payments must be assessed, at least for VAT purposes. The payments to be made may be
- non-taxable damages,
- additional usage fee or
- reduction of the usage fee.
A leasing contract can be terminated prematurely due to contractually agreed termination rights. If the leasing contracts provide for payments in such cases as compensation for future leasing installments, this constitutes genuine compensation. Payments are generally not subject to VAT if they are made as so-called compensation for reduced value due to damage to the leased vehicle. The main obligation of the lessor (= transfer of use of the company car) is terminated by the termination. The payment that the lessee must make as compensation for future leasing installments is no longer in an exchange relationship with a service provided by the lessor. There is therefore no exchange of services.
If the lessee pays compensation for a reduction in value due to Damage to the leased vehicle, This does not constitute remuneration for the transfer of use. It is therefore not an exchange of services that is subject to VAT. On the contrary, he is liable for the damage and its consequences on the basis of the contractual agreements. This is an amount that the entrepreneur must pay as genuine compensation, so that no VAT/pre-tax is incurred.
Leasing contracts often specify the scope of use, e.g. annual use of 15,000 km. The lessor determines the leasing rate on this basis. Contractually agreed compensation payments must be made for deviations from the agreed mileage. The agreements on compensation for excess and reduced mileage are therefore aimed at adjusting the claims arising from the lease to the actual use of the vehicle by the lessee. The consequence is that
- payments by the lessee for excess mileage are an additional charge and
- payments made by the lessor for reduced mileage constitute a reduction in consideration for the transfer of use.
This also applies accordingly to compensation for residual value differences in leasing contracts with residual value compensation. Compensation for use due to late return of the leased vehicle does not constitute compensation for damages, but is remuneration for the transfer of use of the vehicle between the agreed and actual return of the vehicle.