Finance lease vs loan: deduction, VAT and balance sheet impact

Quick answer. A finance lease (leasing) turns an investment into deductible rent without weighing down the balance sheet, whereas a loan brings the asset onto the books and generates deductible depreciation plus interest. The right choice depends on your taxable profit, your cash position and the nature of the asset: there is no one-size-fits-all answer.

Funding a machine, a commercial vehicle, IT equipment or business premises always raises the same practical question: should you borrow and depreciate, or use a finance lease and deduct rent? This is not only about the interest rate. It affects your balance sheet structure, your future borrowing capacity, VAT recovery and the pace of tax deduction. In SME and professional-practice files, it is often the tax angle and the balance sheet, more than the headline cost, that tip the scales.

A finance lease is a rental contract with a purchase option. The lessor (the finance company) buys the asset and rents it to you; you pay rent, then you may exercise the purchase option at the end for a residual value agreed in advance. Until the option is exercised, you are not the owner.

A loan follows the reverse logic: you buy the asset, it enters your assets, and you repay the lender. You are the owner from day one, and the asset sits on your balance sheet.

This ownership difference drives all the accounting and tax treatment that follows.

Comparison table: finance lease vs loan#

In French statutory accounts, a finance lease does not bring the asset onto the lessee's balance sheet. Rent is recorded as operating expense, and the commitments tied to the contract are disclosed in the notes to the accounts (French GAAP, ANC regulation 2014-03). This is a major difference from IFRS, where most lease contracts are instead capitalised.

In practice, a director who finances through a lease shows a lighter balance sheet: no fixed asset, no matching financial debt. This can preserve gearing ratios useful to secure other financing. Conversely, a loan inflates both assets and liabilities, and depreciation then gradually reduces the net book value of the asset.

Our take. A finance lease is often sold as a balance sheet advantage. That is true in statutory accounts, but a seasoned banker restates the off-balance-sheet commitment when assessing your solvency. The optical effect exists; do not build a financing strategy on it alone.

This is where most of the trade-off plays out. Both financings are deductible, but not at the same pace or under the same rules.

Under a finance lease#

Lease rent is in principle deductible from taxable profit, under ordinary conditions (BOI-BIC-CHG-40-20-30). The deduction is often faster than the accounting depreciation of the same asset, because the contract term is usually shorter than the useful life. This is an asset for a profitable company that wants to accelerate its deductible expenses.

Three important limits frame this deduction:

1. For passenger vehicles, the portion of rent corresponding to depreciation above the tax ceiling is not deductible (see the grid below).
2. For real-estate finance leases, a fraction of the rent is added back to profit when the option is exercised, to neutralise the benefit drawn from the non-deductibility of the land (CGI art. 239 sexies).
3. When the option is exercised, the asset is booked at its residual value and depreciated thereafter, extending the deduction beyond the contract.

Under a loan#

An asset bought on credit is depreciated over its useful life, and loan interest is deductible. The deduction is spread out, hence slower, but it runs over the whole life of the asset. For a start-up or a barely profitable company, this slower pace is not a penalty: deducting quickly is pointless if the result is already nil.

Depreciation ceilings for passenger vehicles (a major watch point)#

Whether you buy or take a passenger vehicle on a finance lease, the tax deduction is capped according to CO2 emissions. The grid below applies to vehicles acquired or leased since 1 January 2021 (WLTP scale), and is therefore in force in 2026 (CGI art. 39-4, BOI-BIC-AMT-20-40-50):

The portion above this ceiling remains non-deductible, whether the financing is depreciation (purchase, or lease with capitalisation on option) or the depreciation component embedded in the lease rent. Many directors overlook this: a high-end vehicle does not become more deductible because it is leased.

The underestimated risk. Believing leasing removes the passenger-vehicle ceiling. It does not: the lessor reports to you each year the non-deductible share of rent to add back. If you forget it, this is a classic reassessment.

Under a loan, VAT is charged on the purchase price and recovered in a single go (subject to the right to deduct). Under a finance lease, VAT applies to each rental payment and is recovered over the instalments. This difference in logic changes your starting cash position.

For a heavy purchase, recovering all the VAT at once under a loan is a repayment of cash, but then spreads the effort. Under a finance lease, you do not pay out the VAT on the full price upfront: it is smoothed over the rent. For a company with tight cash, this smoothing is a strong argument.

Be careful, however: for a passenger vehicle, VAT remains in principle non-deductible, whether bought or leased. This exclusion targets the rent share relating to the passenger vehicle. Commercial vehicles, by contrast, give a right to deduct under the usual conditions.

Quick decision by your situation#

In practice#

In an investment file, we follow a simple method to decide:

1. Cost out the full total of each option, financial and tax, over the real useful life of the asset.
2. Check the useful pace of deduction against the forecast taxable profit, not the current result.
3. Measure the impact on the balance sheet and on the ability to obtain other financing within twelve to twenty-four months.
4. Factor in VAT and its cash-flow effect at the start.
5. For a vehicle, apply the CO2 ceiling grid before any conclusion.

This analysis matches the one we detail in our dedicated comparison on the tax trade-off between finance lease and loan, and in our guide to financing industrial equipment.

A construction SME wants to finance a high-value piece of site equipment. It is profitable and is preparing a bank financing request for another project within the year. The finance lease lets it accelerate the deduction of rent while keeping a lighter balance sheet so as not to saturate its reported borrowing capacity. Conversely, a young service company with a still-low result, equipping its workshop, has less interest in deducting fast: a loan, with spread depreciation and immediate ownership, suits it better. Same asset, same amount, opposite trade-off depending on the situation.

On finance lease contracts, the usual control points are the add-back of the non-deductible share of passenger-vehicle rent, the add-back required when the option is exercised on a real-estate lease (CGI art. 239 sexies), the consistency of VAT deducted on rent, and the correct disclosure of commitments in the notes. Careful tracking of the schedules provided by the lessor prevents most reassessments.

• A finance lease deducts rent and stays off the balance sheet in statutory accounts; a loan brings the asset onto the books and deducts depreciation plus interest.
• A finance lease often accelerates deduction: an advantage for a profitable company, neutral for a low or nil result.
• Passenger-vehicle depreciation ceilings apply regardless of the financing method: EUR 30,000, 20,300, 18,300 or 9,900 depending on CO2.
• VAT is recovered at once under a loan, and over the rent under a finance lease: a cash-flow argument at the start.
• For a real-estate finance lease, anticipate the rent add-back when the option is exercised (CGI art. 239 sexies).
• The trade-off depends on your taxable profit, your cash and your future financing needs, not only on the headline rate.