Financial leasing market in Ukraine
(in-depth market study)
General overview. Coming from very low level, leasing in Ukraine has been developing rapidly in recent years, and is becoming one of the most suitable instruments to support the renovation and replacement of Ukraine's obsolete equipment and industrial machinery. According to official data, approximately 50% of the fixed assets of all enterprises in Ukraine are outdated.
Financial leasing, being actively used in Ukraine, is the economic activity aimed at investing one's own or attracted financial funds, which consists of the granting by one party (lessor) to another party (lessee) under a leasing agreement of assets which are the property of the lessor or being purchased by him on behalf or upon agreement with the lessee from respective supplier (seller), for exceptional use for a definite term under conditions of payment of periodic leasing payments by the lessee.
By 1 January 2007 the total lease portfolio in Ukraine was around USD 800 million, as compared to only USD 400 million by 1 January 2006. Despite rapid increase, the Ukrainian leasing market is still in its infancy. It is estimated that the total value of leasing transactions can exceed USD 1 billion in 2009. 39% of leases was railway transport, 20% of financial leases are long term - 3 to 5 years. Aircraft accounts for the largest share in the leasing contracts' portfolio due to the high cost of such assets. Trucks are the second and passenger cars rank third. Imported equipment accounts for most of the leasing transactions.
The lessee is involved in choosing a manufacturer and agreeing with the latter as to specifications of the final product. A manufacturer invests significant resources into the development and adjustment of the equipment and wants a firm commitment from a lessor to purchase and pay for the equipment. The lessor would be required to make a substantial advance payment or to provide security. Many banks consider financial leasing as a form of a loan and leasing companies as direct competitors to banks. Where a foreign manufacturer produces equipment, the lessor is traditionally responsible for importing the equipment into Ukraine and conducting the necessary customs clearance.
Ukraine will most likely increase imports of capital equipment and technologies in the near future. Foreign capital will then have to become a major source of financing for Ukrainian investments.
Leasing has great potential for becoming the preferred tool of foreign investors and its share in the investment volume will most likely show steady growth in the coming years.
Key players. Around 50 leasing companies are operating in Ukraine. Although approximately 70% of such transactions are conducted by 10 leading companies. 79% of Ukrainian leasing companies are based in Kyiv, 9% in Lviv, 6% in Odesa, another 6% in Donetsk. There is a great potential for a regional expansion of leasing in the country. Currently, there are only six leasing companies that cover local regions in the country through agency networks. In most Ukrainian localities leasing is underdeveloped.
Over 30% of the leasing companies in Ukraine are wholly owned by foreign legal entities and 10% of companies have foreign participation. All the rest are resident companies. The survey showed that 39% of leasing companies are bank-related; this offers them the opportunity to use the credit resources of the bank. But this situation is changing rapidly considering the number of banks that recently launched leasing operations or have indicated to be interested in launching leasing operations. Only 19% of the surveyed companies are affiliated with a vendor or producer. These companies are mainly active in the automotive industry. 26% of the leasing companies indicated that they are concluding sale and lease back transactions. With respect to cross border leasing only 3% indicated that they are involved in such transactions.
Market entry and opportunities. Small and medium enterprises are in particular need of leasing services to finance capital investment. Still, leasing companies are hesitant to tap into this market except for car leases where the risks associated with leasing are generally low compared to other assets.
Ukrainian leasing companies approach this problem by careful evaluation of potential lessees and thorough structuring of deals based on their experience. Practically all Ukrainian leasing companies require an advance payment (about 20% of the cost of the leased equipment, with percentages ranging from 15% to 30%) to be made by the lessee for the purpose of hedging against a default. Occasionally leasing companies require the lessee to provide additional collateral.
Financing of operations of leasing companies is a major problem that impacts the development of leasing business in Ukraine. In addition to the lack of long-term financing, high interest rates and bank charges do not contribute to a rapid development of the Ukrainian leasing market.
Offering access to cheap long-term financing of capital expenditures could be a key competitive advantage to foreign banks or leasing companies in Ukraine.
Leasing object. The following objects may not be subjects of a leasing agreement: land plots and other natural objects; integral property complexes of enterprises and their individual structural subdivisions (branches).
Within the limits of financial leasing agreement the transfer of ownership of the lease object to the lessor is not envisaged as the final goal of the leasing agreement. Financial leasing consists exceptionally in granting the right of use of the leasing object. The lessor is entitled to transfer the ownership of the leasing object to third parties, whereas all rights and obligations of the lessor under the leasing agreement shall be transferred to the new owner of the leasing object.
If the lessee wishes to purchase the lease object, then the conclusion of a separate sale-purchase agreement with the lessor is necessary. The right of title to the leasing object shall be transferred to the lessee as of the time of payment of the purchase price if otherwise not provided for by the sale-purchase agreement. The leasing object cannot be seized or arrested due to the acts of the lessee.
Leasing payments. A leasing payment may consist of:
a) an amount that reimburses for a part of value of the leasing object;
b) payment as a fee to the lessor for property obtained on lease;
c) reimbursement for interest on a loan;
d) other lessor's expenses that are connected directly with fulfillment of a leasing agreement (for example, costs incurred by the lessor for transportation, payment and assembly of the leasing object; costs incurred for customs clearance (customs duty and other charges), registration of the leasing object and other costs related to purchase and transfer of the leasing object as well as reimbursement of insurance payments if the leasing object has been insured by the lessor).
The leasing object and/or the risks connected with fulfillment of the leasing agreement shall be subject to insurance provided law or the leasing agreement establishes their obligation. Insurance expenses under a leasing agreement shall be borne by the lessee, unless otherwise established by the leasing agreement.
Sub-leasing. Conclusion of a sub-leasing agreement is allowed if the lessor has given his written consent to this. Such consent may be given either in a leasing agreement or in a separate document.
While the object is being sub-leased, the legal claim with regard to the seller (supplier) shall be transferred to the lessee under a sub-leasing agreement. Provisions of the leasing agreement shall be applicable to the sub-leasing agreement, unless otherwise established by the leasing agreement.
Refusal of leasing agreement. The lessee with the right to unilaterally refuse a leasing agreement by written notification to the lessor in the event of a delay of over 30 days in the transfer of the leasing object, unless the other term is stipulated by the leasing agreement. In such a case the lessee shall be entitled to claim reimbursement for the losses, including return of payments paid to the lessor prior to such refusal.
The lessor is entitled to refuse a leasing agreement and to claim the return of the leasing object from the lessee per the indisputable procedure on the ground of the notary's executive writ, provided the lessee did not effect one of the lease payments in part or in full and the delinquency is over 30 days.
Legal aspects. Leasing relations are regulated at legislative level by three documents: Civil Code of Ukraine, Commercial Code of Ukraine and Financial Leasing Law. With respect to leasing legislation, the Law of Ukraine “On Financial Leasing” provides comprehensive regulation of this sector. It defines financial leasing, describes the rights and obligations of the lessee and the lessor and the conditions governing early termination of the leasing contract. Moreover, the Law stipulates guidelines as to the protection of the rights of the lessor in case the lessee defaults on a contract. Although the law provides rules for relatively easy repossession, the execution of the law, in case of non-cooperation of the lessee, can be a serious problem.
The parties to a leasing agreement can be the following:
1) lessor - a legal entity, which transfers the right of possession and use to the lease object to the lessee;
2) lessee - an individual or legal entity, which receives the right of ownership and use of the lease object from the lessor;
3) seller (supplier) - an individual or legal entity selling the leasing object to the lessor;
4) other legal entities or individuals, which may be parties to a multilateral leasing agreement (dealers, brokers, auction mediators, insurance and service companies, etc.).
The substantial provisions of a financial leasing agreement are the following:
- description of the leasing object;
- term of leasing;
- amount of leasing payments;
- other provisions agreed upon as substantial by the parties.
The Financial Leasing Law is the basic document determining the legal aspects of financial leasing in Ukraine. Pursuant to the Financial Leasing Law the lessor is obliged to purchase the leasing object from the seller (supplier) in accordance with the specifications and terms set out by the lessee and transfer it for use by the lessee for a certain term for agreed payment (leasing payments).
The lessor should attempt to shift to the lessee, to the extent possible, any risks involved in the transaction (e.g. the risk that it might remain committed under supply and financial contracts despite the lessee's default and other lessee related risks, liquidity risk, risks that the equipment may have defects or not be delivered on time, etc).
The simplest way to achieve the shift of risks would be to have a financial leasing agreement executed by three parties, i.e. the supplier of the equipment, the lessor and the lessee.
Unfortunately, this solution ordinarily does not work. Not only might it complicate the accounting of the transaction and negotiations with each of the parties, but generally the lessor would be unwilling to fully disclose the arrangements it has with each of the parties.
As a matter of practice, the lessors generally settle for a supply agreement executed by the lessor and the manufacturer, and then a separate financial lease agreement between the lessor and the lessee. The financial lease agreement may contain elaborate provisions on the liability of the lessee for obligations undertaken by the lessor in implementation of the transaction and a shift of liability for non-delivery of equipment and its defects to the manufacturer. Even though careful drafting could provide certain comforts to the lessor, there is little, if any, court practice to show if such provisions limiting a lessor's liability would be fully enforceable. As for the obligations of the lessor towards financiers and manufacturers, appropriate provisions could also be incorporated into contracts. Still, a better solution is to make a lessee a party to the supply and even financing agreement.
Special attention should be paid to the lease fees. The structure of the lease payment generally mirrors various fees and payments to be made by the lessor to the manufacturer and financing parties. However, Ukrainian civil law is very formal in defining various elements of lease fees. Ukrainian tax laws provide for different VAT and corporate tax treatment depending on the way a particular payment is qualified under the lease agreement.
In accordance with Financial Services Law financial leasing is a financial service, which can be provided by financial institutions. The systematic provision of leasing services (three or more leasing agreements within a calendar year or for an amount exceeding UAH 80,000) requires registration of the lessor with the State Commission on Regulation of Financial Services Markets of Ukraine.
The lessor is obliged to register a leasing transaction with the competent state body. The registration of leasing transactions with the State Commission for the Regulation of the Financial Services Market in Ukraine is quite simple and inexpensive.
Currency control. Currency transactions with the participation of residents and non-residents of Ukraine are subject to currency control. Since the performance of a cross-border leasing transaction implies transfer of money to or from a non-resident, the transactions fall under the currency control regime. The agent of currency control shall be the authorized Ukrainian bank.
Goods/works/services/intellectual property rights paid for by a Ukrainian resident, pursuant to an import contract concluded with a nonresident, must be imported and cleared through Ukrainian customs within 90 days from the date on which such resident made payment. Failure to do so can result in a fine of 0.3% of the amount due or paid for each day of delay. The excess of the said terms requires the acquisition of an authorization from the Ministry of economy.
The control over a leasing transaction where the lessee is a Ukrainian resident shall be cancelled upon the delivery of the object of leasing to the territory of Ukraine (whose delivery must be carried out within 180 days from the date of the first leasing payment). All payments under a leasing transaction where the lessor is a Ukrainian resident should be performed by the non-resident lessee within 180 days from the date of export of the object of leasing (the date of execution of the cargo customs declaration).
A Ukrainian resident intends to lease quite an expensive piece of equipment which is produced in Ukraine. The producer for some reason insists on immediate purchase rather than leasing. The resident applies then to a foreign institution which is willing to finance the purchase and subsequently to act as the lessor for the said equipment. On the one hand the Currency Control Regulations expressly stipulate that control over a leasing transaction where the lessee is a Ukrainian resident shall be cancelled upon delivery of an object of leasing to the territory of Ukraine. However, on the other hand, in the described scheme the object of leasing is already located in Ukraine; hence, its import cannot be formalized.
Cross-border leasing transactions are classified as "operations related to capital flow" rather than trade operations. The documents required from a resident lessee for purchase of foreign currency to be paid as a lease payment are restricted to (i) application for purchase of foreign currency, and (ii) original agreement confirming the need to fulfill obligations in foreign currency, accompanied by the copy of same.
Taxation aspects. Profit of a Ukrainian non-resident as leasing payments from Ukrainian residents or permanent establishment of such non-resident are subject to withholding tax at the rate of 15%. Profit in the form of reimbursement of value of goods (works, services) is not subject to withholding tax. Therefore, the amount that is reimbursed for the part of the leasing object's value, shall not be taxable by withholding tax.
The tax rate can be reduced based on double taxation treaties concluded by Ukraine with the following countries: Austria, Belgium, Bulgaria, Canada, China, Cyprus, Germany, Great Britain, Greece, the Czech Republic, Denmark, Egypt, Estonia, Finland, France, Hungary, India, Italy, Japan, Latvia, Lithuania, Norway, the Netherlands, Poland, Portugal, Russia, Romania, Slovakia, Spain, Sweden, Switzerland, Turkey, United Arab Emirates and the US.
Should you need any help on import or export of any product from/into Ukraine or conducting any leasing transactions, feel free to contact us through our web site – www.kpl.net.ua Our professional managers are always ready to assist you. Because we perfectly know Ukrainian market, we can save you a great deal of time and money, help you to make right decision and prevent fraud.
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The Law of Ukraine “On Financial Leasing”
This Act determines the general legal and economic principles of financial leasing.
Article 1. Definition of financial leasing
1. Financial leasing (hereinafter - leasing) shall mean a type of civil and legal relations arising from a financial leasing contract.
2. Under a financial leasing contract (hereinafter - leasing contract) the lessor shall be obliged to acquire an object into ownership from a seller (supplier) pursuant to specifications and conditions established by the lessee, and transfer it into use to the lessee for a specified term of not less than one year for an established fee (lease payments).
Article 2. Financial leasing legislation
1. Relations arising in relation to a financial leasing contract shall governed by provisions of the Civil Code of Ukraine on leasing, rent, purchase and sale, supply taking into account specifics established by this Act.
2. Relations arising with regard to acquisition of the economic administration right to the object of a leasing contract shall be governed by the rules established to regulate relations arising from the ownership right to the object of a leasing contract, except for the right to dispose of the leasing object.
Article 3. Leasing object
1. An object of a lease contract (hereinafter - leasing object) may be an inconsumable thing defined by individual features and classified by valid legislation as fixed assets.
2. Land plots and other natural objects, integral property complexes of enterprises and their separated entities (subdivisions, affiliates, shops, branches) may not be leasing objects.
3. State or municipal property not prohibited for transfer into use and/or possession may be transferred for leasing in the order established by this Act.
Article 4. Leasing subjects
The following entities may be leasing subjects:
a lessor - a legal entity that transfers to the lessee the right to possess and use the leasing object;
a lessee - a legal entity or an individual that accepts from the lessor the right to possess and use the leasing object;
a seller (supplier) - a legal entity or an individual from whom a lessor acquires a thing that in future shall be transferred to a lessee as a leasing object; other legal entities or individuals which are parties to a multilateral leasing agreement.
Article 5. Subleasing
1. Subleasing shall be a type of sublease of the leasing object, according to which the lessee transfers the leasing object to third persons (the lessees under a sublease contract) for an agreed term and into use pursuant to the sublease contract, after this leasing object was received earlier from the lessor under a leasing contract.
When the object is subleased, the legal claim with regard to the seller (supplier) shall be transferred to the lessee under a sublease contract.
2. Written consent of the lessor under a leasing contract that agrees to the subleasing of the object shall be a mandatory requirement for a sublease contract.
3. Provisions of the lease contract shall be applicable to the sublease contract, unless otherwise established by a leasing contract.
Article 6. Leasing contract
1. A leasing contract shall be concluded in writing.
2. The following shall be essential clauses of a leasing contract:
leasing object; term of entitlement of the right to the lessee to possess and use the leasing object (lease term);
amount of leasing payments;
other provisions to be agreed upon an application by at least one party.
3. The leasing term shall be established by the parties to the leasing contract pursuant to the requirements of this Act.
Article 7. Refusal of leasing contract
1. The lessee shall be entitled to unilaterally refuse a leasing contract by written notification thereof to the lessor in the event of a delay of over 30 days in the transfer of the leasing object, unless another term is stipulated by the leasing contract.
The lessee shall be entitled to claim reimbursement for losses, including return of payments paid to the lessor prior to such refusal.
2. The lessor shall be entitled to refuse a leasing contract and to claim return of the leasing object from the lessee in the order of the indisputable procedure on the grounds of a notary's executive writ, provided that the lessee did not effect one of the leasing payments in part or in full and the delinquency is over 30 days.
Collection under the notary's executive writ shall be effected in the order stipulated by the On Judicial Enforcement Act of Ukraine.
3. The leasing contract shall be regarded as refused from the moment that the other party learned or could learn about such refusal.
Article 8. Right of ownership to the leasing object.
Procedure of settlements in case the ownership right is transferred to the lessee
1. In the event of transfer of the right of ownership to the leasing object from the lessor to the other person, the lessor's respective rights and obligations under the leasing contract shall be transferred to the new owner of the leasing object.
2. In the event that the parties to the lease contract concluded a purchase and sale agreement for the leasing object, the right to ownership of the leasing object shall be transferred to the lessee provided and from the moment he paid the price established by the contract, unless otherwise envisaged by the contract.
3. The leasing object may not be confiscated or seized due to any actions or inaction on the part of the lessee.
Article 9. Protection of the lessee's right to the leasing object
1. The lessee (sublessee) shall be ensured protection of his rights to the leasing object equal to protection of ownership rights established by legislation.
2. The lessee (sub-lessee) shall be entitled to claim, including from the lessor, removal of any violations of his rights to the leasing object.
Article 10. Rights and obligations of the lessor
1. The lessor shall have the right to:
1) invest his own funds as well as attracted finances and loan funds into acquiring the leasing object;
2) inspect observation by the lessee of the conditions for the use and maintenance of the leasing object;
3) refuse the lease contract in cases stipulated by the leasing contract or the law;
4) demand termination of the contract and return of the leasing object in cases stipulated by the leasing contract and legislation;
5) collect outstanding debt from the lessee in the order of the indisputable procedure based on the notary's executive writ;
6) claim reimbursement from the lessee for losses pursuant to legislation and the contract;
7) demand the return of the leasing object and fulfillment of monetary obligations under a sublease contract directly to the lessor in the event of non-fulfillment or delay of fulfillment of the lessee's monetary obligations under a leasing contract.
2. The lessor shall be obliged to:
1) within the term stipulated by the contract to transfer to the lessee the leasing object in the condition corresponding to its designation and contractual provisions;
2) notify the lessee about specific features and defects of the leasing object known to him that may pose a hazard to life, health and property of the lessee or other persons, or may result in damage of the leasing object itself during its use;
3) pursuant to the contract provisions, fulfill the obligation maintenance of the leasing object in time and in its entirety;
4) reimburse the lessee for expenses to improve the leasing object, to maintain it or to eliminate defects in the order and in cases envisaged by the Act and/or the contract;
5) accept the leasing object in the event of the contract's early termination or in the event of expiry of the term of use of the leasing object.
3. The lessor may also have other rights and obligations pursuant to the provisions of the leasing contract, this Act, and other regulations.
Article 11. Rights and obligations of the lessee
1. The lessee shall have the right to:
1) choose the leasing object and the seller or determine specification of the leasing object and assign selection to the lessor;
2) refuse acceptance of the leasing object that does not correspond its designation and/or the contract's provisions/specifications;
3) demand termination or refusal of the leasing contract in stipulated by the Act and the leasing contract;
4) claim reimbursement from the lessor for losses inflicted by non-fulfillment or undue fulfillment of the provisions set out in the leasing contract.
2. The lessee shall be obliged to:
1) accept and use the leasing object pursuant to its designation and contractual provisions;
2) pursuant to the contract provisions fulfill the obligation on the maintenance of the leasing object in time and in its entirety, maintain it in working order;
3) make leasing payments in a timely manner;
4) ensure access for the lessor to the leasing object and the possibility to verify the conditions of its use and maintenance;
5) inform the lessor in writing and the seller of the object during the warranty period about all cases of trouble-shooting, breakdowns or errors in operation regarding the leasing object;
6) inform in writing about violation of terms or delay in carrying out current or seasonal technical maintenance and any other circumstances that may adversely affect the condition of the leasing object - immediately, but in any case not later than on the second business day following the day of the above events or facts, unless otherwise established by the contract;
7) in the event of expiry of the leasing term and early termination of the leasing contract and in other cases of pre-schedule return of the leasing object - return the leasing object in the condition it was accepted for holding, taking into consideration its normal depreciation or in the condition stipulated by the contract.
3. Conditions for repair and technical maintenance of the leasing object may be established by a separate contract.
4. The lessee may also have other rights and obligations in accordance with the provisions of the leasing, this Act and regulations.
Article 12. Registration of the leasing object
The leasing object shall be subject to registration in cases and in the order envisaged by this Act.
Article 13. Risk of accidental destruction or damage of the leasing object and its insurance the required expenses to be reimbursed or for their value to be offset against leasing payments.
1. The risk of accidental destruction or damage of the leasing object shall rest with the lessee from the time the leasing object is transferred to the lessee's possession, unless otherwise stipulated by the contract.
2. The leasing object and/or the risks connected with fulfillment of the leasing contract shall be subject to insurance provided it is mandatory in accordance with the law or the contract. Insurance expenses under a lease contract shall be borne by the lessee, unless otherwise established by the contract.
Article 14. Maintenance of the leasing object
1. The lessee shall keep the leasing object in working condition during the entire period of leasing.
2. During the leasing period the lessee shall bear expenses for maintaining the leasing object connected with its operation, technical maintenance and repair, unless otherwise stipulated by the contract or the Act.
Article 15. Legal consequences of the leasing object's improvement by the lessee
1. The lessee shall be entitled to improve the object of the leasing contract upon the lessor's consent only.
2. In the event that the leasing object is improved without the lessor's permission, the lessee shall be entitled to withdraw the improvements made by him, provided such improvements may be separated from the leasing object without damage being suffered by it.
3. In the event that improvements to the object were made with the lessor's consent, the lessee shall have the right for the value.
Article 16. Leasing payments
1. Leasing payments shall be made in the order established by the contract.
2. A leasing payment can include:
a) an amount that compensates a part of the value of the leasing object;
b) payment as a fee to the lessor for the property obtained on lease;
c) reimbursement for interest on a loan;
d) other lessor's expenses that are connected directly with fulfillment of the leasing contract.
Article 17. Dispute resolution
1. Disputes arising during conclusion and execution of leasing contracts shall be resolved pursuant to legislation.
2. Disputes arising from international leasing contracts shall be resolved taking into account provisions for consideration of disputes and their resolution established by such contracts.
Article 18. Depreciation charges
1. Leasing depreciation charges shall be calculated pursuant to the Act.
2. Pursuant to legislation, a leasing contract may envisage accelerated depreciation of the leasing object.
Article 19. Final provisions
1. This Act shall come into effect from the day of its publication.
2. The acts and other regulations, approved before this Act comes into effect, shall be valid in so far as they do not contradict this Act.
3. The Cabinet of Ministers of Ukraine shall, within one month from the time this Act comes into effect:
prepare and submit to the Ukrainian Parliament proposals on changes to the legislation resulting from this Act;
bring their regulatory acts into compliance with this Act;
develop regulations envisaged by this Act;
ensure approval by ministries and other state executive bodies of Ukraine of the regulations stipulated by this Act and bring them into compliance with this Act.