Operating lease: meaning, features and benefits

An operating lease is a rental arrangement in which the vehicle stays owned by the leasing company while your business uses it for a fixed monthly fee. That fee typically covers servicing, insurance, tyres and roadside assistance, so running the fleet stays predictable and admin-free.

Unlike a finance lease, an operating lease is about usage rather than ownership: at the end of the term you simply hand the car back or swap it for a new one. This is especially attractive for companies with shorter operating cycles seeking off-balance-sheet financing.

Under both operating and finance lease arrangements, the lessor generally retains legal ownership of the vehicle throughout the lease term. One of the key differences between the two arrangements is how the leased vehicle is recorded for accounting purposes. Another important distinction is who owns the vehicle at the end of the lease term.

With an open-end finance lease, the lessee has the option to purchase the vehicle at the end of the lease term. If the lessee decides to exercise this option, the vehicle can be purchased by paying the agreed residual value to the lessor.

The main difference between open-end and closed-end finance leasing concerns the transfer of ownership.

Under a closed-end finance lease, ownership of the vehicle automatically transfers to the lessee at the end of the lease term.

By contrast, with an open-end finance lease, the lessee can decide whether to purchase the vehicle at the end of the agreement.

With an operating lease, the emphasis is on using the vehicle rather than owning it. Accordingly, ownership does not transfer to the lessee at the end of the lease term. Instead, the vehicle is returned to the lessor, with the residual value determined under the terms of the agreement.

Although monthly payments under a finance lease may be lower, operating leasing offers a range of included and optional services that are generally not covered by standard finance lease payments.

Operating leasing may also provide several financial advantages:

• The VAT on the vehicle's purchase price may be reclaimed by the lessor in accordance with applicable legislation, meaning that only the net purchase price needs to be financed.
• The lessee may recognise rental payments as business expenses in accordance with applicable tax regulations.
• VAT on rental payments may be deductible under the relevant legislation, including in the case of passenger cars.
• Businesses can allocate their financial resources to their core activities rather than tying up capital in vehicle purchases and fleet-related investments.
• Fleet management can provide significant cost advantages through economies of scale in vehicle purchasing, servicing and insurance.

Balance Sheet Treatment

Under traditional finance lease arrangements, the leased asset is recorded in the lessee's accounts, whereas under operating lease arrangements, it is generally recorded on the lessor's balance sheet.

Depending on the applicable accounting framework, operating leasing may therefore offer an off-balance-sheet financing solution for the lessee.

Long-term vehicle rental can also provide an alternative source of financing without necessarily affecting the company's existing credit facilities. Under Hungarian civil law, operating lease arrangements are generally not classified as financial services.

However, the accounting treatment of leases depends on the applicable accounting standards, and certain operating leases may need to be recognised on the lessee's balance sheet.

VAT Deduction and Corporate Income Tax

Operating lease payments may be recognised as business expenses, while VAT charged on rental payments may be deductible in accordance with applicable tax legislation.

Lease payments may also be deductible when calculating the corporate income tax base, subject to the relevant legal requirements.

• Simple and efficient leasing process: At Schiller, operating leasing is straightforward, with fast, efficient administration and professional support throughout the process.
• Dedicated account manager: Every client has a dedicated account manager who provides personalised assistance and helps ensure smooth communication and administration.
• Predictable monthly costs: Rental payments are designed to support long-term financial planning and also include vehicle registration costs.
• Comprehensive administration and vehicle management: Our team of specialists handles the administrative and operational tasks associated with your fleet, including comprehensive CASCO insurance and compulsory third-party liability insurance arrangements. Thanks to our fleet insurance agreements, we can also offer favourable premiums and low deductibles.
• One monthly invoice: All expenses associated with your company's vehicles, including compulsory insurance and CASCO coverage, can be consolidated into a single monthly invoice.
• Full-service leasing: If you choose our full-service long-term rental solution, we also take care of vehicle repairs and maintenance at our authorised service centres. These costs can be included in the same monthly invoice alongside your other leasing-related expenses.
• Optional additional services: In addition to our standard services, you can choose from a range of additional solutions tailored to your business needs:
  • Vehicle-related administrative and regulatory procedures
  • GPS installation
  • Vehicle pick-up and delivery service
  • 24/7 roadside assistance in Hungary and abroad
  • Replacement vehicles during servicing
  • Fuel cards
  • Mobile parking services
  • Motorway vignettes
• Cost-effective servicing: Professionally reviewed service invoices, preferential servicing rates and predictable fixed service fees help you manage your fleet's operating costs.
• Preferential tyre prices: Our large-scale tyre purchasing activities enable us to offer competitive tyre prices to our clients.
• Lower financing costs: The difference between the discounted vehicle purchase price and its expected market residual value helps reduce the amount that needs to be financed.
• Hassle-free vehicle return: At the end of the lease term, the vehicle is returned to Schiller, so you do not have to deal with the time-consuming process of selling a used company car.