Accounting and VAT
Only a general overview of the accounting treatment of leasing transactions and VAT accounting is given here. Additional advice can be found in the Regulatory section.Accounting treatment
In accounting, lease accounting is governed by the Lease Accounting Manual No.9 adopted by the Estonian Accounting Standards Board. (as last amended in 2011), which is in accordance with SME IFRS Chapter 20 "Leases".
A finance lease is a lease in which all the significant risks and rewards of ownership of the asset are transferred from the lessor to the lessee. Ownership may or may not ultimately pass to the lessee.
On the inception of the lease, the lessee recognises the finance lease in its balance sheet as a fixed asset and a liability, respectively, at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The lessee calculates depreciation on the leased asset using the normal depreciation principles applied by an enterprise to assets of the same type.
A finance lease is a lease that is not a finance lease under this guidance. The lessee does not depreciate the asset and recognises the payments under the operating lease as an expense on a straight-line basis over the lease term, irrespective of when the lease payments are actually made.
Accounting for VAT
The accounting treatment of the lease transaction is not determinative for the VAT Act, which follows from the Accounting Practice Guidance issued by the Accounting Standards Board.
Capital Lease is treated as sale of goods and on sale of goods, turnover arises at the earliest of the following: transfer of possession of the goods, receipt of part or full payment. Thus, at the time of the conclusion of the leasing contract, the customer will be invoiced with the first instalment and the Contract Fee. After payment of the invoice, the customer will receive by post a payment schedule and an invoice showing the total price of the asset, including VAT. The amounts due after the invoice is received will be due according to the payment schedule agreed in the leasing contract. The VAT shown on the invoice can be declared by the customer as input VAT in the month shown on the invoice. The amount of input VAT to be declared depends on the asset and the method of deduction of input VAT agreed by the purchaser with the tax authorities (direct, proportional or mixed method). As of 1 December 2014, following the amendment to the VAT law, the acquirer must keep track of whether the car is used exclusively for business purposes (which would entitle the company to a 100% input deduction) or also for private use (in which case the company is only entitled to a 50% input deduction, which may be further reduced if the company has an exempt business in addition to its taxable business). This restriction on the deduction of input VAT also extends to goods and services purchased for the use of passenger cars.
Previous regular contract payments are not a supply of goods or services within the meaning of the VAT Act. However, the lessor is required to declare the interest shown separately on the monthly invoices as exempt turnover. For the lessee, the monthly invoices are more of a reminder of the obligations due.
A lease of a property is treated as a sale of a service and, where a regular supply of services is made to the same purchaser, the time of supply of the service is deemed to be the tax period ending with the period for which the invoice is issued. At the time of the conclusion of the leasing contract, an invoice is issued to the customer for the First instalment and the Contract Fee, which is subject to VAT. Based on this invoice, the lessee can after payment of the invoice agreement for a full-service lease where the lessor and the lessee have agreed on monthly rental payments, which include various additional service packages of the customer's choice, without specifying them on the invoice, the lessor will be liable for VAT on the total rental amount shown on the invoice.
In the case of both operating and finance leases the lessor will be liable to VAT on the additional services and the resale to the lessee of the additional goods resulting from the contract, if they are shown separately on the invoice.
Insurance brokerage payments collected from the lessee and any claims for damages, contractual penalties and interest on arrears arising from the contract are not subject to VAT.
Please note that the Union and its member companies do not accept any responsibility for the accounting and tax treatment of the business of a business client.
The KPMG Leasing taxation document can be found HERELeasing taxation Estonia_05.10.2023.pdf