On 4 February 2021, the Ukrainian parliament adopted draft Law No. 1111 "On Financial Leasing", which will replace the existing 1998 law when it comes into force three months after its signing by the President and its official publication. The Law provides for significant improvement of the financial leasing legal framework in Ukraine by introducing regulation for financial leasing accompanying services (e.g. agency, consultation, insurance, valuation services, etc.), extending the range of financial leasing objects and strengthening consumer rights protection. These new measures will stimulate broad and stable development of the Ukrainian leasing market and create new business opportunities. It is also expected that only financial institutions will be able to provide financial leasing services, which will be detailed in relevant legislation to be adopted later. The Draft Law, therefore, lays the foundation for the National Bank of Ukraine (as the financial services regulator) to further elaborate on regulatory requirements for financial leasing market participants, including requirements for licensing, capitalisation and financing requirements.
While the financial leasing concept remains the same, the Law provides for a clear definition of financial leasing and specifies its features – aligning some regulations and removing previously existing ambiguities between the current law, and Civil, Economic and Tax Codes.
Leasing is qualified as financial if all risks and rewards regarding the use of the object are transfered to a lessee and at least one of the following features is in place:
- at least 75% of original value of the object is depreciated, and the lessee is obliged to acquire ownership over the object, during the term of the lease agreement;
- the total amount of lease payments is not less than the initial value of the object;
- the residual book value of the object in the end of the lease term is not more than 25% of its initial value; and/or
- the object is produced at the lessee’s request and cannot be used by any other person after the expiration of the agreement due to its specific technological and quality characteristics.
The Draft Law also removes existing legal loopholes and “blind spots”, such as:
- providing that no notarisation of a vehicle financial leasing agreement with an individual is required, unless requested by a party to an agreement;
- specifying the consequences for parties after the termination or invalidation of an agreement, which should stop the existing court practice reflecting the unfair interpretation of bilateral restitution that often results in a free use of the lease object by the lessee; and
- providing that the financial leasing object must not be included into the liquidation estate of a lessee in the event of its bankruptcy.
New measures introduced by the Law
The new Draft Law introduces the following:
Subleasing: the Law extends the regulation of subleasing activities on the financial leasing market. Importantly, in order to further sublease a lease object, a sublessor will need to comply with the regulatory requirements set by Law, which are likely to be the same as those applicable to a lessee’s legal status as a financial institution.
Accompanying services: the Draft Law introduces the regulation of financial leasing accompanying services. The scope of such services includes agency, consultation, insurance, valuation, and repair services among others. Requirements for the providers of such services will be further regulated by the NBU. This new measure is expected to stimulate development of services in the financial leasing market.
Extended range of objects: under the Draft Law, an enterprise's single property complex and their separate structural subdivisions can now be transferred into financial leasing. This is expected to enhance the potential for infrastructural development of financial leasing. Still, land and other natural and immovable property objects are banned from financial leasing, which otherwise might have become an important financing instrument for the development of the land market in Ukraine.
Lease payments linked to foreign currency: the Law expressly allows for lease payments to be determined by linking those to their foreign currency equivalent (which previously was a questionable practice). This applies to agreements with legal entities and private entrepreneurs only.
Consumer rights protection: the Law binds lessors with information disclosure obligations vis-à-vis consumer-lessees, thus aligning consumer rights protection on the financial leasing market with trends in the financial services market in general.
Importantly, the Law lays the groundwork for the NBU (i.e. the financial services regulator) to further elaborate on regulatory requirements for financial leasing market participants, including measures regarding licensing, capitalisation and financing requirements.
For more information on this Draft Law, contact your regular CMS advisor or local CMS experts: Anna Pogrebna, Taras Chernikov, Ihor Olekhov, Kateryna Chechulina and Ivan Pshyk.
Source: Text of the draft Law No. 1111 "On Financial Leasing" (in Ukrainian).
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