V.S. Belykh, Doctor of Law,
Professor, Head of Business Law Chair
Urals State Law Academy
Leasing in Russian Legislation: Problems of Establishment and Development
Leasing as a kind of entrepreneurial activity has been widely spread both in cross-border and Russian practice due to its advantages over the other financial business instruments (operations). Traditionally, in the corresponding literature these undisputed advantages include: enlargement of products sale, reducing risks, keeping working capital, flexibility of payments schedule, tax privileges, longer terms of transactions.
To legally define the concepts of «leasing», «leasing operations», «leasing activity» let’s turn to Russian legislation, judicial practice and also to literature on economy and law.
The first normative act dealing with leasing operations in Russian Federation was the President Decree dated September, 17, 1994 №1929 «On the Development of Financial Leasing in the Investment Activity»1. It is here where the first definition of leasing was given: «a kind of business activity aimed at investing temporary funds or attracted financial means into property transferred according to a contract to physical or legal entities for a definite term»2.
At present leasing operations in Russia are regulated by the Civil Code of RF (Chapter 34 «Lease», § 6 «Financial Lease (leasing)») and the Federal Law dated September, 11, 1998 № 164-FL «On Financial Lease (leasing)»3. By the Federal Law dated February, 8, 1998 № 16-FL4 Russia joined the UNIDROIT Convention «On International Financial Leasing»5 that came into force for Russia on the 1st of January 1999.
2. Concept and Essence of Leasing
In a very simplified meaning leasing is usually understood as long lease. But a more comprehensive and thorough analysis reveals a whole set of characteristic features that provide sufficient grounds for regarding it as a particular kind of relations, a particular civil law contract.
Russian Legislation regards leasing and leasing activity as follows. First, the Civil Code (CC) of RF does not contain the definitions of leasing and leasing activity, it only discloses the content of a leasing contract. According to Art. 2 of the Law on Leasing, leasing is regarded as a combination of economic and legal relations arising from the execution of a leasing contract and including inter alia the acquisition of the object of leasing; leasing activity is a kind of investment activities on acquiring property and transferring it into leasing.
Thus, this Law clearly distinguishes between the concepts of «leasing» and «leasing activity». We also think that the given difference has the right for exis-tence and is of practical importance. We think that the category of «leasing» has several aspects: economic, organization- technical, legal etc.
So from the economic point of view leasing constitutes the system of economic relations. In this meaning leasing is the subject of legal regulation.
However, leasing might also be regarded as a kind of economic (entrepreneurial) activity. Being a kind of social activities leasing is not reduced to a mere combination of actions. It consists of a number of correlated and consecutive entrepreneurial actions (leasing operations) aimed at one purpose. Consequently, in short leasing is the combination of leasing operations.
And, at last, from the legal point of view (primarily – that of civil law) leasing is a kind of legal relations between a leasing organization (a finance lessor) and a finance lessee on providing leasing services.
Other aspects of leasing have been named in the corresponding literature. Economists, for example, often regard leasing as a financial instrument of the investment activity, of definite investments.
Thus, let’s make some intermediate conclusions. First, a multi-layer concept of leasing should not give rise to the confusion of the concepts «leasing», «leasing activity», «leasing legal relation» – they are not synonymous terms. Second, economic aspect of leasing should not be ignored. Moreover, in a civil law sphere leasing should be regarded as combination of economic and legal relations mostly due to its economic essence and functions. Third, the legal definition of leasing is not perfect and has certain shortcomings.
First of all it should be mentioned that the economic definition of leasing through the combination of economic relations does not disclose the essence of leasing. The phrase «combination of economic relations» from the Law on Leasing is widely used for characterizing other phenomena and concepts. Let’s give some examples: any product perceived as economic category is considered to be the combination of social-economic relations of human beings in the process of reproduction of material values.
The same can be said about ownership from the economic point of view. Developing this idea, we can regard a unitary enterprise as a social relation of production6. And not only of production.
For example, the Law of RF dated September, 27, 1992 № 4015-1 (in wording of FL dated 29.11.2007 № 57-FL) «On Establishing Insurance Business in Russian Federation»7 (Art. 2) defines insurance as relations on the defense of interests of physical and legal entities, Russian Federation, subjects of Russian Federation and municipal entities in case of particular insured accidents at the expense of the pool of money supported by the insurers from paid insurance premiums (insurance payments) and also at the expense of other insurers’ funds. In other words this law regards insurance as an economic category (combination of economic relations)8.
Thus, from the economic point of view leasing is the combination of economic relations of purchase and sale, lease and investment arising from leasing activity of a finance lessor and his using the property by means of leasing it to a finance lessee for a definite term9. But the main element of leasing is that it constitutes a financial instrument of investment by means of a long-term lease of property. It’s not by chance that in the Law on Leasing and corresponding literature leasing and leasing activity are considered within the framework of investment activity and a leasing contract as an investment agreement. As a law category leasing might be regarded as a civil law institute, a contract, a system of obligations (sale, lease etc.).
3. Leasing Activity
Leasing activity is a complex category. First of all, it is a kind of economic activities.
Coming from the legal definition of leasing activity the latter is a kind of investment activity on acquiring property and transferring it into leasing. Some authors suggest to change the phrase «investment activity» for «entrepreneurial activity». According to Ye. V. Chernikova, leasing as a kind of activity is not reduced to the actions of a finance lessor only and is not limited by making a leasing contract. «Leasing actually should be regarded as an extremely multi-layer and multi-faceted category embracing directly not only a leasing contract but also other elements closely connected with it»10.
We agree to the statement that leasing activity is a kind of entrepreneurial activity. According to Art. 665 of the CC of RF property is transferred to a finance lessee for temporary possession and use for entrepreneurial aims. But referring to the investment nature of this activity in the definition of leasing contributes to a greater extent to realizing the economic nature of leasing. Moreover, we think that a number of potential legal services users should be enlarged including, inter alia, budget organizations. That’s why we consider it to be reasonable and advisable to make some amendments into the CC of RF (ART. 665), the Law on Leasing and point at the possibility of temporary possession and use of the leased property for entrepreneurial or professional aims11. The limit in operation essentially reduces the sphere of applying leasing by organizations not engaged in entrepreneurial activity.
Different social relations arise from and around leasing activity. The first group of relations constitutes the relations between those participating in leasing activity. Traditionally these relations in the corresponding literature are called horizontal ones.
The second group constitutes the relations between a finance lessor and state and municipal bodies. These relations might be called the vertical ones. The specific proportion of these relations in practice is obviously much less than the horizontal ones.
4. Forms and Kinds of Leasing
The Law on Leasing (Art. 7) defines the main forms of leasing: internal and cross-border. At the same time current legislation of RF does not provide for different kinds of leasing.
In the previous wording of the Law on Leasing there were three kinds of leasing: financial, operational and leasing-back. Traditionally, financial and operational leasings were distinguished by the correlation between the term of a leasing contract and the term of amortization of the object of leasing. In a financial leasing a term of contract is equal to or longer than a term of amortization, in an operational leasing it is shorter than a term of amortization, so property may be transferred into leasing several times. In a new wording of the Law on Leasing an operational leasing was eliminated from the text as a kind of leasing. The argument for this was the point of view12 that an operational leasing is a traditional lease. This opinion was supported by judicial practice. So in the ruling of the Federal Arbitration Court of West-Siberian district dated March, 6, 2001 on the case № F04/637-70-2001 it was particularly stressed that there are neither economic nor legal features of a financial lease in an operational leasing and the latter actually is a traditional lease; in an operational leasing contract you won’t find a feature indispensable from and obligatory for a leasing contract, namely, the duty of a finance lessor to acquire the property from a particular seller according to the instructions of a finance lessee.
Meanwhile, removing an operational leasing from the text of the Law resulted in some problems in practice, in particular, connected with cases when the property is nor transferred into the finance lessee possession (if, for example, a contract is cancelled because of improper execution of contractual duties by a finance lessee) and is returned to a finance lessor. The second transfer of this property for temporary possession and use to the other lessee is not considered to be a leasing (this is what was called an operational leasing in the previous wording of the Law on Leasing), but a traditional lease because this operation does not contain any investment element.
A leasing-back as also assessed differently because sometimes such contracts were made exclusively with the aim of using tax privileges provided for in leasing operations. But a leasing-back is directly provided for by the Law on Leasing (Art. 4 p.1) and its application is supported by judicial practice13.
There exist different classifications of leasing in the corresponding literature. In some of them there are up to 38 kinds of leasing14 The Law on Leasing contains the rule (Art. 7) on additional services in leasing operation. These services should be directly connected with the execution of a leasing contract. By the way, the essence of many particular kinds of leasing is defined by providing additional services.
Leasing is a universal mechanism that may be used in different spheres of activity. But it should be taken into account that specific character of leasing relations in particular spheres of activity requires a certain state regulation, for example, to provide the balance of the parties’ interests. So, analyzing the normative acts, both federal and regional, one might call a wide range of various kinds of activities connected with leasing in this or that way. There are also dissertation researches devoted to leasing in different spheres of activities15.
A specific place is taken by leasing in banking16. According to Art. 5 of the Federal Law dated December,2, 1990 № 395-1 «On Banks and Banking»17 leasing operations are included into the range of transactions authorized for credit organizations. So, taking into account the fact that leasing presupposes transactions on purchase and sale of the object of leasing, leasing operations constitute a kind of exemption from the rule of the same article, according to which a credit organization is prohibited to be engaged in production, trade and insurance activities.
At present credit organizations use leasing as additional to crediting activity that allows to take into account the clients’ interests and needs to a longer extent. In doing this credit organizations most often do not directly act as finance lessors – they do this through created particularly for this purpose leasing companies. This is determined mostly by economic reasons, in particular, by the necessity to execute the requirements of the Bank of Russia normative acts to the capital of credit organizations and also by the aims of optimizing their structure.
5. Concept and Content of a Leasing
The CC of RF (Art. 665) defines a leasing contract as follows: this is a contract according to which a lessor must acquire into ownership some property from a particular seller pointed at by the lessee and for temporary possession and use let this property to a lessee for payment for entrepreneurial aims. Art. 1 of the UNIDROIT Convention and Art. 2 of the Law on Leasing give similar definitions.
So we see that a leasing contract is characterized by the following peculiar features: a) a finance lessor must have the aim to invest, i.e. to make a contract with the aim of investing money resources into property that will be let on lease then; b) having made a contract a finance lessor must acquire the property from a particular seller pointed at by a finance lessee; c) a finance lessee must use the leased property for entrepreneurial aims; d) according to a contract property must be transferred to a finance lessee both into possession and use; e) it must be transferred for a definite term; f) if it is specified in a contract a finance lessee should have the opportunity to buy the object of leasing back by means of leasing payments (Art. 4 p. 1 of the Law on Leasing)18.
The analysis of the normative features of a leasing contract makes it possible to clearly define its place in the system of civil law contracts. It constitutes a bilateral transaction closely connected with a purchase and sale contract. A leasing contract is a kind of lease.
There is no agreement as to the legal structure of a leasing contract and its place in the system of civil law contracts among academic lawyers. It should be pointed out that their opinions have been divided into two large groups. Representatives of one group believe that a leasing contract constitutes a more complicated structure of a lease contract so is a kind of a lease contract19. The other stick to the opposite opinion that a leasing contract is a particular type of a contract20.
The discussion on the legal nature of a leasing contract and the contracts connected with it is extremely important. It should help to find the most efficient approach to qualifying contractual relations that, in its turn, might be applied in a law making process. In particular, an adequate qualification of relations helps to reveal simulated contracts when, for example, relations arising from a purchase and sale contract are disguised by a leasing contract for a tax shelter21.
It is necessary to distinguish between leasing and related to it institutes such as purchase and sale, credit and lease. To understand the essence of leasing and to tell it from related institutes it is necessary to examine leasing from economic and legal perspectives. If in purchase and sale property is transferred into ownership of a purchaser, in leasing property remains in ownership of a finance lessor up to the end of the term of a contract. Leasing can’t be regarded as a form of crediting either. In spite of some similarities between leasing and crediting from the economic point of view, the nature of economic relations in them is different. From the legal point of view, these phenomena are absolutely different. It concerns the legal treatment of property, the subject of a contract and, finally, the very nature of relations.
The most controversial and vexed problem is that of distinguishing between leasing and lease. Leasing being a kind of entrepreneurial activity has some peculiar features in comparison with lease. It is characterized by a more complicated structure, the staff of the participants – the subjects of entrepreneurial activity who are a seller, a finance lessor and a finance lessee. In lease it is a lessor who is engaged in entrepreneurial activity (though not always), for a lessee this is not obligatory. Leasing relations constitute (in contrast to lease) the combination of interconnecting relations regulated by the rules of law and corresponding civil law contracts. In comparison with lease leasing has a particular social-economic aim and organization-legal relations reflecting its peculiarity. But in this (economic-legal) meaning leasing is the system of contracts with a finance lessor, a finance lessee, a seller and other persons as participants. In the strict (narrow) meaning a leasing contract constitutes a kind of lease with all the consequences coming from it.
Participants of leasing relations do not execute their common (coordinated) will necessary for making any contract. It concerns, first of all, a seller and a finance lessee. Then, their relations can’t be regulated by the rules of the CC on concluding, changing and cancelling contracts, their (contracts’) invalidation etc.
Let’s illustrate this by the provisions of the CC. According to Art. 667 of the CC of RF a lessor (a finance lessor) must notify a seller of a leasing transaction. In this case a finance lessee has the right to make on a seller all the requirements coming from a purchase and sale contract between a finance lessor and a seller. The risk of non-execution of obligations according to a purchase and sale contract is laid on a party that has chosen a seller if otherwise is not specified in a contract. The same principle is provided for in respect of the risk of disparity between the object of leasing and the aims of its use.
A finance lessee has the rights and bears corresponding obligations granted to a seller except for the obligations to pay for the property. In particular, a finance lessee must take the object of leasing according to a procedure specified in a leasing contract. The data permitting to clearly define the property that is the object of leasing belong to the material facts of a leasing contract. If there are no such data, a contract might be considered not concluded.
A finance lessee must pay to a finance lessor regular payments in order and terms specified by a leasing contract. The obligations on leasing payments come into force starting with the use of the object of leasing if otherwise is not specified in a leasing contract. General sum of leasing payments for the term of a contract usually includes reimbursement of a finance lessor expenses for acquiring and transferring the object of leasing reimbursement of expenses for other services specified in a leasing contract and a finance lessor income. It may also include a buy-back price of the object of lease if a leasing contract specifies transferring the right of ownership on the object of lease to a finance lessee.
The question on transferring the right of ownership for the object of leasing must be specified in a leasing contract. It should be admitted that the necessity of making a purchase and sale contract between a finance lessor and a finance lessee in transferring the right of ownership on the object of leasing as it is required by § 5 Art. 15 of the Law on Leasing according to which on the termination of a leasing contract a finance lessee must return the object of leasing if otherwise is not specified in a leasing contract or acquire the object of leasing into ownership on the basis of a purchase and sale contract, is not evident in all cases. Hardly can concluding a purchase and sale contract be justified if a leasing contract specifies transferring the right of ownership for the object of leasing on the termination of a leasing contract and buy-back price was included into leasing payments.
The Federal Arbitration Court of East-Siberian district in its ruling dated 13.02.2006 № A19-11342/05-46-F02-193/06-S2 stated the following on this question: «If a leasing contract specifies transferring the right of ownership on the object of leasing to a finance lessee when the latter has made all the payments it is not necessary in this case to make a purchase and sale contract in future. The structure of such leasing contract corresponds in particular provisions to the structure of a purchase and sale contract with deferred payment. A concluded purchase and sale contract is considered to be invalid according to Art. 168 of the CC of RF because both in accordance with a purchase and sale contract with deferred payment and with a leasing contract specifying the transfer of the right of ownership property (subject of a contract) can’t be sold because it is not possible to sell one and the same thing twice»22.
According to Art. 31 of the Law on Leasing the object of leasing is registered in the balance of a finance lessor or a finance lessee on the agreement of the parties. But the object of leasing can’t be registered by an individual entrepreneur because legislation does not demand any accounting balance sheet from individual entrepreneurs. Judges regard this as tax avoidance23.
A peculiar and important feature is the right of a finance lessor for unquestionable writing sums off an account of a finance lessee within the framework of the debt if the latter did not transfer leasing payments to an account more than two times in succession. This is one of the rare cases, when legislation directly prescribes the possibility of unquestionable writing sums off a debtor’s account in civil law legislation.
In general legislation allows for a great variety of terms in a leasing contract. A contract may specify circumstances that both parties refer to obvious and undeniable breach of obligations and that lead to termination of a leasing contract and seizure of the object of leasing. This possibility is an extra guarantee to defend the interests of a finance lessor from the actions of a non bona fide finance lessee.
One more essential guarantee has been fixed in Art. 23 of the Law on Leasing: a third party can’t levy execution upon the object of leasing on a finance lessee obligations. The Law on Leasing also provides for some provisions concerning the maintenance of property, production of indivisible improvements, registration and insurance of the property that is the object of leasing.
At present in RF as in other industrial developed countries leasing operations are efficiently developed and take a definite niche among other kinds of entrepreneurial activities. The scientific experience and the elaboration of theoretical approaches to legal regulation of leasing operations should contribute to further development of leasing and – finally – its turning into efficient instrument of entrepreneurial activity.
1 Compiled Laws of RF. 1994. №22. Art. 2463
2 The Decree is not valid now. It was followed by the Executive Order dated 29.06.1995 № 633 «On the Development of Leasing in the Investment Activity» that was later substituted for Part II of the Civil Code of RF.
3 Compiled Laws of RF. 1998. № 44. Art. 5394. Hereinafter – the Law on Leasing.
4 Compiled Laws of RF. 1998. № 7. Art. 787.
5 Compiled Laws of RF. 1999. № 32. Art. 4040.
6 See: Yakushev V.S. Legal entity of a state-owned production enterprise. Sverdlovsk. 1973, pp. 4-9.
7 Originally the text of the document was published : a newspaper «Rossiyskaya Gazeta». 1993. № 6.
8 See: Belykh V.S., Krivosheev I.V., Mitrichev I.A. Insurance Law of Russia: Study Guide/ Managing editor V.S. Belykh. 3d edition revised. Moscow, 2009, p.21.
9 See: Chernikova Ye. V. Finance Lease Contract (Leasing) in Market Economy. Dissertation abstract…Candidate of Law. Yekaterinburg, 2007, p.10.
10 See: Chernikova Ye. V. Ibid, p.15.
11 Kravchenko O.A. Leasing as a Civil Law Means of Market Relations Development. Diss. Abstract… Candidate of Law. Krasnodar, 2005, p.10.
12 See: Serkova Yu. A. Leasing Contract in Russian and Foreign Law: Diss. Abstract…Candidate of Law. Kazan’ 2002, p.16; Vitryansky V.V. Lease Contract and Its Kinds. Moscow, 2000, p.250.
13 See: the ruling of the Highest Arbitration Court of RF of 16.01.2007 № 9010/06 states: «The possibility of applying a leasing-back according to which the property acquired by a finance lessor is transferred to a finance lessee who is at the same time a seller, is provided for by Art. 4 of the Law and has reasonable business motives and aims for both parties of the given transaction that (motives and aims) do not result in unreasonable tax saving».
14 See: Goremykin V.A. Leasing: Textbook. Moscow, 2003, p.53.
15 See: Reshetnyak I.A. Civil Law Regulation of Leasing in RF. Diss. Ab-stract…Candidate of Law. Perm, 1998; Gruzdeva A.A. Leasing in Civil Law of Russia. Diss. Abstract…Candidate of Law. Saratov, 2000; Contractual Relations Between Agricultural Commodity Producers: Monograph/ Ed. By Ikonnikova I.A., Belyayeva Z. S. Moscow, 2003,- 256 p; Zemlyakova G.L. Leasing in Agriculture of Russia: Legal Regulation. Moscow, 2004, -215p.
16 On participating of credit organizations in leasing operations see: Credit Organizations in Russia: Legal Aspect/ Managing editor Ye. A. Pavlovskiy. Moscow, 2006; Ayupov A.A. Innovation Leasing in Bank. Kazan’, 2002; Leonova M.S. Banking Capital in Leasing Business// International Banking Operations. 2007, № 1.
17 Compiled Laws of RF. 1996. № 6. Art. 492.
18 See: Civil Law: Textbook 3 volumes. V.3 4th edition revised/Managing editor A.P. Sergeyev, Yu. K. Tolstoy. Moscow, 2003, pp.230-231.
19 See: Romanets Yu. V. The System of Contracts in Civil Law of Russia. Moscow, 2001, p. 70; Vitryanskiy V. V. Ibid, p. 297.
20 See: Reshetnyak I. A. Ibid, p. 7, Kharitonova Yu. Leasing Contract. Moscow, 2002, p. 80; Sukhanov Ye. Disputes on the Future that Arises from the Present// Business and law. 2001. № 9, p.131.
21 See: the ruling of the Highest Arbitration Court of RF dated February, 16, 2007. № 14849/06.
22 Meanwhile, there are also other approaches, see: the ruling of the Federal Arbitration Court of the Ural district of 21.05.2007 № F09-3677/07-S5.
23 The ruling of the Federal Arbitration Court of the East-Siberian district dated October, 12, 2005. Case № A33-1805/05-F02-4933/05-C1.