THEORY AND PRACTICE Legal Experience of Siberian

Leasing Company

pg.2

EXPERT OPINION Is the VAT Exemption Necessary?

pg. 4

SMALL BUSINESS«Diana-Trust»

pg.7

LEASING IN THE REGIONSVolkhov, Leningrad Region

pg. 9

LEASING ABROAD IFC’s Experience in International

Leasing Markets

pg. 11

THE LEASING PROJECTEvents in the Group

pg. 14

NEWSPress Digest

pg.15

ACCOUNTINGSumming Differences

pg.18

QUESTIONS ANDANSWERS

pg. 19

C O N T E N T S :

INF

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Published by the Leasing Development Group of the International Finance Corporation (IFC), a Member of the World BankGroup, with financial support from the Canadian International Development Agency and the British Know-How Fund

MARCH - APRIL 2000, Issue 2 (8)

DIANA-TRUSTCreating Professional Dry Cleaners from scratch

Irina Likhachova

Anyone who has used the Diana Company knows it to be a

high-quality, dependable dry cleaner. But this is far from

being the only service offered by Diana Holding Company.

Among business circles, Diana-Trust (part of Diana Holding

Company) is better known for specializing in the creating profes-

sional dry-cleaners from scratch businesses. Diana-Trust today is

one of the bright examples of a successful Russian business.

It all started

with an idea that

became feasible

in large part due

to leasing. Diana

will soon create

its own leasing

company in an

attempt to offer

more flexible

financial plans to

companies under

the Diana trade-

mark (or to any

other client that

wants to buy equipment).

(details on pg. 7)

ATTENTION: NEW SECTION«LEASING ABROAD»

LC introduces a new section covering the situa-tion in international financial leasing markets.

In this issue LC offers its readers an overview of IFC’s experi-ence and its overall approach to working in international leas-ing markets. (See page 12.)

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2 March-April 2000THEORY AND PRACTICE

The Leasing Courier has already written once about

the experience of the Siberian Leasing Company (city of

Kemerovo).1 In this issue we will look more closely at the

legal aspects of their business, using real examples

from the courtroom. The LC would like to thank the

Siberian Leasing Company for its cooperation and for

providing the information materials used in this article.

PENAL SANCTIONS AND VAT

In the case of Siberian Leasing Company vs. OpenJoint Stock Company Bytproyekt Project Instituteover the recovery of lease payment arrears and

penalties for non-payment, the court decided, whenassessing fines, to exclude VAT from the sum of thelease payments. On that same day, however, in a simi-lar case of Siberian Leasing Company vs. PartnershipLtd. Kuzbass-ASKO Insurance Company, the verysame judge assessed a fine on the entire sum of theunpaid lease payments, including VAT. In which of thecases was the judge right?

According to court practice, when penalties and inter-est are stipulated by the term of a contract or by law forthe non-payment of goods or services, they must beassessed on the price of the goods or services exclu-sive of value-added tax.2 The arbitration courts’ positionon this matter is based on the following tenets:

• In accordance with Clause 1, Article 7 of the RFLaw «On Value-Added Tax», goods and services are tobe sold to enterprises at prices increased by the sum ofVAT;

• The percentages, fines and penalties stipulatedunder an agreement may only be assessed in the eventof a violation of civil financial obligations.

Consequently, claims for unpaid lease paymentsstemming from the non payment of VAT are not applic-able, since this tax belongs to the sphere of public, notcivil, legal obligations.

If, however, the lease agreement does not stipulatethe inclusion of VAT in the sum of the lease payment,then, in assessing a payment obligation claim for unpaidlease payments, the arbitration court must levy finesequal to the value of services indicated within the agree-ment, i.e. they must assess a charge equal to the fullamount of the lease payment.

Therefore, for the purpose of calculating fines forunpaid lease payments, it makes sense when filing a

lawsuit claim suit with the arbitration court to excludeVAT from the sum of the lease payment. This way theleasing company does not end up paying excessiveduties to the state.

The Siberian Leasing Company consulted with ajudge from the Kemerovo Region Arbitration Court onthis question. In the judge’s opinion, if a plaintiff wantspenalties to be assessed for the entire value of leasepayments, including VAT, then he must stipulate withinthe contract, under the clause on penalties, that penal-ties will be charged on the entire payment, includingVAT. The Siberian Leasing Company has not yet triedthis approach in the arbitration courts. In our view, thisadvice is somewhat dubious, since even this phrasing inthe agreement does not change the fact that value-added tax belongs to the sphere of public, not civil, law.

INCREASES AND REDUCTIONS IN THESIZE OF CLAIMS

The plaintiff’s (leasing company’s) right to increaseor reduce the size of a claim, as stipulated under

Article 37 of the RF Arbitration Procedural Code (APC),plays an important role in the consideration of claims forthe recovery of unpaid lease payments and penalties fornon-payment. Since lease payments are spread outover time, not made in lump sum, this right enablesleasing companies to increase the size of their claims,in relation to both the principal debt and the amount ofpenalties, while the case is still being heard. TheSiberian Leasing Company has made use of this right,to their advantage, on numerous occasions.

Leasing companies can exercise the right to increaseor reduce their claims, as stipulated under Article 37 ofthe RF APC, until a verdict has been rendered by a courtof first instance. This rule does not apply to hearings atother instances (such as appeals court). The lessor canalso exercise this right during a new hearing at a courtof first instance if the case has been remanded from acourt of appeals or court controlling body.3

It should be noted that what is meant by an increasein the size of a claim is an increase in the size of theoriginal claim made by the plaintiff when he filed suit. Anincrease in the size of a claim may not be based on anynew claims that were not presented when the suit wasfiled. Thus, if a leasing company has only filed suit forthe recovery of unpaid lease payments, it may not addpenalties for non-payment to its original claims, as this

LEGAL ASPECTS OF THE SIBERIAN LEASING COMPANY’S COURTROOM PRACTICE

Olga Shishlyannikova, attorneyIFC Leasing Development Group

1 See LC #6, 1999, pp 2-4, 10-12.

2 See Rescript #9 of the Presidium of the RF High Court ofArbitration, «A Survey of Court Decisions and PracticesRegarding Legislation on Value-Added Tax».

3 See Plenum of the High Court of Arbitration Resolution #12«On the Implementation of the RF APC in the Court of FirstInstance» of 31 October 1996 (9 July 1997 redaction of Plenumof the Higher Court of Arbitration Resolution #12).

will not be considered an increase in claims made underthe original suit. Such new claims can only be made byfiling a new suit.

I would like to draw your attention to one other aspectof penalties as a means of enforcing lease agreements.In practice, when drafting those articles of a leaseagreement that define the parties’ obligations, leasingcompanies often write exclusively about the penaltiesfor lease-payment default and forget to mention otherpayments, such as property redemption payments, thatmay constitute part of a lease agreement. In this case,the Siberian Leasing Company recommends thatlessors charge the legal penalties stipulated underArticle 395 of the Civil Code of the Russian Federation.

SECURING CLAIMS

When suing through the arbitration courts, leasingcompanies often have to worry about securing

the value of their claims as well. This need arises incases where the leasing company fears that it will be dif-ficult or impossible to execute the court’s decision. Inpractice, the arbitration courts have proved very reluc-tant to take any measures to secure claims to protectthe lessor’s rights, as the Siberian Leasing Companyhas previously discovered. In its suit against thePartnership Ltd. Kuzbass-ASKO Insurance Company,the leasing company requested that the court take mea-sures to ensure its claims. It based this request on thefact that the lessee had not made a single lease pay-ment from the very beginning of the lease agreementand had avoided any out-of-court settlement. Not onlydid the arbitration court refuse to meet the plaintiff’srequest to sequester the defendant’s assets, but alsodid not provide any explanation for this decision.

Considering the arbitration courts’ practices in thismatter, a court’s decision on whether or not to take mea-sures to secure the plaintiff’s claims is generally influ-enced by the defendant’s reaction to previous offersfrom the plaintiff to resolve the conflict out of court, ifsuch a resolution is permitted by law or under the termsof the agreement. The decision can also be influencedby any correspondence that took place between theparties before the suit was filed. Leasing companiesmust therefore keep detailed written records of all nego-tiations with the lessee and preserve any correspon-dence relating to the lease agreement.

The arbitration courts’ decisions regarding measuresto secure claims may be appealed in accordance withArticle 160 of the RF APC. Leasing companies alsohave the right to submit new petitions for measures tosecure their claims if circumstances change during thecourse of the hearing or new evidence appears todemonstrate that a failure to take measures for securingtheir claims will make it difficult or impossible to executethe court’s decision.

We would also like to point out that the most commonmethod of securing claims — sequestering the defen-dant’s assets - should not entail the seizure of his bankaccounts or any future funds deposited in such

accounts.4 Because, if the arbitration court finds that thedefendant lacks sufficient funds in his bank account tomeet the plaintiff’s claims, it may refuse the plaintiff’spetition to sequester the defendant’s funds.

THE RISK OF VENDOR DEFAULT ON THETERMS OF A SALES AGREEMENT FORLEASED PROPERTY

The Siberian Leasing Company is currently involvedin a very interesting lawsuit over the recovery of

losses from a lessee. In brief, the case is the following:

In September 1999, the leasing company signed alease agreement and delivery contract for leased proper-ty. The lessee chose both the vendor and the propertyhimself. He also assumed responsibility, under the leaseagreement, for the transportation of the leased property.The lessor paid for the leased property and gave thelessee the necessary papers for its transfer. However, theleasing company has not heard anything about the fate ofthe leased equipment or whether it was ever received bythe lessee. The lessee has not made any of his leasepayments, nor has he responded to the lessor’s frequentinquiries. The leasing company’s efforts to locate the ven-dor have also been fruitless. Therefore, the leasing com-pany has potentially lost its investment in the equipment,with potentially no recourse to either party.

The Siberian Leasing Company found itself in a com-plicated situation. Since the lessee did not have theleased property in his possession, the leasing companydid not have the right to demand lease payments for thepossession and use of the property. Regardless, theleasing company sued the lessee for losses (investmentexpenditures for the acquisition of leased property andnon-receipt of profit) through the arbitration courts.

In our opinion, although the explicit legal foundationfor this is unclear, the leasing company’s claims couldbe based on the statutes in Articles 15, 309, 393, 665and 670 of the Civil Code of the Russian Federation. Asper the lease agreement, the responsibility for choosingthe vendor of the leased property lies with the lessee.Therefore, it is the lessee who bears responsibility forthe actions of the vendor. Furthermore, this conclusioncan be based indirectly on Articles 665 and 670 of theRF Civil Code, which indicate that the lessor (leasingcompany) does not bear responsibility for the choice ofvendor nor for the vendor’s fulfillment of the terms of thesales agreement, where the responsibility for choosinga vendor lies with the lessee.

We shall continue to follow the development of thiscase in the arbitration courts and inform LC readers ofits outcome.

Readers have expressed a strong interest in this andsimilar topics. We would be very grateful, therefore, ifothers in the leasing business would agree to sharetheir experiences in the arbitration courts with theLeasing Courier.

March-April 2000 3THEORY AND PRACTICE

4 See Rescript #6 of the Presidium of the RF High Court ofArbitration, «On the Resolutions of the Presidium of the RF HighCourt of Arbitration Regarding Various Matters of CourtPractice».

4 March-April 2000EXPERT OPINION

Iwould like to share a most «seditious» thought withyou: does the leasing sector really need VATexemptions under the existing tax system? Most

readers will probably be surprised that anyone wouldask such a question. Logically, one would think, themore tax breaks the better. However, upon closerinspection, this particular tax break does not yield theanticipated positive results. Moreover, it actually has anegative effect on certain lessees’ financial situations.

As of 1 January 1996, lease payments have beenexempted from VAT under Russian Federation Law N 25-FZ of 1 April 1996. This exemption applies only to lesseesthat qualify as small businesses. While many leasing com-panies worry that the VAT exemption on lease paymentsis not applicable to all lessees, the leasing companies nei-ther gain nor lose from the tax break. (Except, if one con-siders that the exemption has some advertising value inmaking leasing appear more attractive). However, it isactually the lessee who suffers the negative effects of theexemption. The problem lies in the following:

The VAT exemption was established under Article 5 ofRF Law N 1992-1»On Value-Added Tax» (6 Dec. 1991)and its subsequent amendments and additions. Thisarticle stipulates that all of its statutes must be observedwithout exception; therefore, the parties to any transac-tion that falls within the purview of the article arerequired to claim the VAT tax exemption, whether theywish to or not.

This would not be a problem for the lessee if leasingcompanies could register a leased asset without includ-ing VAT, thereby enabling them to charge depreciationon the property’s value without including VAT. In thisway, the corresponding lease payments could be calcu-lated without including VAT.

However, if a leasing company purchases propertythat is to be used in a VAT-exempt transaction, thenaccording to Clause 49 of RF State Tax Service’sInstruction N 39, «On Regulations for the Calculationand Payment of Value-Added Tax» (11 Oct. 1995), itmust include the amount of VAT paid upon purchasingthe property in the property’s book value.1 Over the termof the leasing agreement, the small enterprise«redeems», through its lease payments, the value of theproperty plus the VAT included in its book value.

This statute means that although small businessesformally make their lease payments without VAT, thesize of the payment does not actually decrease. Even, ifthe «small enterprise» was not VAT exempt, we wouldobtain the same result. We shall demonstrate this with asimple example.

EXAMPLE:

The value of a given property is 120 units before VAT,or 144 units after VAT. The term of the lease is 4 years.Depreciation is charged in a linear fashion at a rate of25% per year, and the property is fully depreciated overthe term of the agreement. The lessor charges a 20%commission based on the residual value of the property.Payments are made annually.

We shall now calculate the lease payments using thetwo methods most commonly used by leasing companies.

Under the first method we calculate consistently theamount of compensation for the value of the propertyand the amount of the commission (the so-called com-ponents method). This method forms the basis of the«Methodological Suggestions for the Calculation ofLease Payments» ratified by the RF Ministry of theEconomy on 19 April 1996.

Under the second method we base our calculationson the theory of financial rents. This method is some-times called the coefficient method. Lease paymentsare calculated according to the following formula:

where

R - lease payment;

In the «Expert Opinion» section we publish materials sent to the editorial board by participants in the leasing

sector. The purpose of this section is to show the diversity of existing opinions. The opinions of the authors pub-

lished in this section do not necessarily represent the official opinions of the International Finance Corporation.

IFC does not guarantee the accuracy or reliability of the information presented in these articles or bear any

responsibility for the consequences of its use.

A VAT EXEMPTION THAT DOESN’T HELP

Leonid PrilutskyGeneral Director of Infonaladka

Doctor of Economics

1 «Fixed assets and non-material assets used in the productionof goods or services exempt from value-added tax under sub-clauses «v», «sh», «y» and «ya-1» of Clause 1, Article 5 of the RFLaw «On Value-Added Tax» (sub-clauses «v» and «yu» ofClause 12 in the current instruction) are to be recorded in thebooks at the purchase value, including the amount of tax paid.»Clause 49 of the RF State Tax Service’s Instruction N 39, «OnRegulations for the Calculation and Payment of Value-AddedTax» (11 Oct. 1995)

C - property value including all additional expenditures

ß - lessor’s commission in portions

N - number of lease payments

an,ß - deferment (payment) coefficient

Let’s see how the size of the lease payments changesunder the components method, depending on whetheror not we apply the VAT tax exemption. The results ofour calculations are presented in Tables 1 and 2.

Table 2. Calculation of Lease Payments With the VAT Tax Break (lease payments are VAT exempt)

March-April 2000 5EXPERT OPINION

Residual Value ofProperty

Depreciation Deductionsper Period

Commis-sion

PaymentBefore VAT VAT

PaymentAfter VAT

Year 1 120 30 24 54 10,8 64,8

Year 2 90 30 18 48 9,6 57,6

Year 3 60 30 12 42 8,4 50,4

Year 4 30 30 6 36 7,2 43,2

Contract

Total 0 120 60 180 36 216

Table 1. Calculation of Lease Payments Without the VAT Tax Break (lease payments are not VAT exempt)

Residual Value ofProperty Depreciation

Commis-sion

TotalPayment

Year 1 144 36 28,8 64,8

Year 2 108 36 21,6 57,6

Year 3 72 36 14,4 50,4

Year 4 36 36 7,2 43,2

Contract

Total 0 144 72 216

As you can see from Tables 1 and 2, the contract totalis 216 units in both cases. The total of the lease pay-ments is also the same for each period.

If we use the second method, the contract total andthe total of the lease payments will also be the same.This follows from Formula 1, where the value of thecoefficient an,ß is the same for both calculation meth-ods, while the value of the property differs by theamount of VAT, which increases the property valuewhen the VAT exemption is applied, and increases thesize of the lease payments when it is not. From thegiven data we can calculate the value of the coefficientan,ß. It comes out to 0.386.

R TAX BREAK = 144 * 0.386 = 55.584;

R VAT = 120 * 0.386 * 1.2 = 55.584,

where

R TAX BREAK - lease payments with the VAT exemption

R VAT - lease payments without the VAT exemption.

Thus, a small business’ lease payments will be exact-

ly the same regardless of whether the payments areVAT exempt or not. Therefore, does it make a differenceto a small business whether or not the exemption isapplied? As it turns out, the application of this exemptionnot only fails to improve the financial situation of a smallbusiness, but it actually harms it. If a small businesspays VAT as part of its lease payments, then it candeduct this sum from its taxes. But if it is VAT exempt, itcannot claim VAT as a profit tax deduction and it con-sequently ends up paying more profit tax than it wouldif the exemption simply didn’t exist.

There is a saying in Russian: «They had the bestintentions, but it turned out like usual.» We shall nowillustrate the problem with a concrete example.

ANALYSIS OF CASH OUTFLOW

An analysis of the cash outflow is given in Tables 3and 4. In Table 3, we take the results obtained

with the components method (as per Tables 1 and 2) asour initial data. The figures in Table 4 are based onlease payments calculated under the coefficientmethod.

6 March-April 2000EXPERT OPINION

In a lease agreement, a small enterprise’s cash flow is

determined by its lease payments, the crediting of VAT

and the savings on its profit tax.

Lease payments constitute an outflow of cash from

the company and are therefore represented in this

model by a «-» sign. The credit on VAT paid, as well as

savings on profit tax, both constitute increases in the

company’s funds, and are therefore represented in this

model by a «+» sign. The calculations yield a negative

cash flow, which represents an outflow of cash from the

company.

Notes to the Calculations:

Savings on profit tax are based on the inclusion of

lease payments in the lessee’s production costs. This

figure can be found by multiplying the decrease in tax-

able profit (i.e. the amount of the lease payment) by the

rate of profit tax (30%).

If the lease payment is VAT exempt, then the lessee

includes the entire amount of the lease payment in the

cost of production, so the savings on its profit tax for the

first period are calculated as the sum of the lease pay-

ment times the rate of profit tax. If VAT is included in the

lease payment, then it is the amount of the payment

minus the VAT that is included in its production costs.

The amount of the VAT that is included in the lease pay-

ment may then be deducted from the lessee’s taxable

income.

In Table 3, for example, the savings on profit tax for

the first year were calculated as follows:

With VAT exemption:

64.8*0.3 = 19.4

Without VAT exemption:

(64.8-10.8)*0.3 = 16.2

Taking into account the discounting of these funds

does not change the essence of the matter, because a

small enterprise that is VAT exempt has a more signifi-

cant cash outflow in all periods as compared with an

enterprise which is not VAT exempt.

The results of our calculations demonstrate the fol-

lowing:

If a small enterprise is VAT exempt, then its cash out-

flow over the term of the agreement will be 151.2 units.

If it is not VAT exempt and it pays the tax in the usual

fashion, it ends up spending 126.7 units, or 24.5 units

less (Table 3). If the coefficient method is used to calcu-

late the lease payments, as noted in Table 4, the differ-

ence becomes even larger, totalling 26 units over 4

years. The savings amount to approximately 20% of the

property’s book value, a significant sum in actual fact.

Although a small enterprise saves more on profit tax

by claiming the VAT exemption, its cash outflow is lower

without the VAT exemption, since VAT is credited in this

case and cash outflow decreases.

1 2 3 4 1 2 3 4

(-64,8) (-57,6) (-50,4) (-43,2) (-64,8) (-57,6) (-50,4) (-43,2)

0 0 0 0 10,8 9,6 8,4 7,2

19,4 17,3 15,1 13,0 16,2 14,4 12,6 10,1

(-45,4) (-40,3) (-35,3) (-30,2) (-37,8) (-33,6) (-29,4) (-25,9)

(-151,2) (-126,7)

Table 3.

Without VAT ExemptionWith VAT Exemption

Payment Period

Lease Payments Including VAT

VAT Credit

Savings on Profit Tax

Annual Outflow

Total Cash Outflow Over 4 Years

1 2 3 4 1 2 3 4

(-55,6) (-55,6) (-55,6) (-55,6) (-55,6) (-55,6) (-55,6) (-55,6)

0 0 0 0 9,3 9,3 9,3 9,3

16,7 16,7 16,7 16,7 13,9 13,9 13,9 13,9

(-38,9) (-38,9) (-38,9) (-38,9) (-32,4) (-32,4) (-32,4) (-32,4)

(-155,6) (-129,6)

Table 4.

Without VAT ExemptionWith VAT Exemption

Payment Period

Lease Payments Including VAT

VAT Credit

Savings on Profit Tax

Annual Outflow

Total Cash Outflow Over 4 Years

DIANA-TRUSTCreating Professional Dry Cleaners from scratch

Irina Likhachova

March-April 2000 7SMALL BUSINESS

(Continued from page 1.)

Diana is now the leading Moscow company in thedry-cleaning and laundering market, as well asin the development of dry-cleaning from scratch

businesses. Diana Holding Company owns 12 factoriesand has about 200 pick-up points around Moscow.These separate legal entities are united under the Dianatrademark, sharing unified business strategies, manage-ment, and advertising campaigns. Diana-Trust also cre-ates dry cleaners for its partners in other Russian cities,as well as in the former Soviet Republics. About 20 fac-tories have been opened in St. Petersburg, Novosibirsk,

Samara, Chelyabinsk,Irkutsk, Ryazan,Kaliningrad, Tyumenand other regions ofRussia, Ukraine andKazakhstan.

When helping clientsdevelop their own dry-cleaning companies,Diana provides themwith everything theyneed (equipment andtechnology) to start uptheir business. Evenmore important, Dianateaches them how tomake a profit in the dry-cleaning business.

The first time Diana reorganized an existing dry clean-er to create a new «Diana» was in 1993. The project wasreviewed and implemented by experts from an invest-ment company affiliated with BFT Bank. Very few peoplebelieved in 1993 that anyone could make a living in thedry-cleaning business. At that time almost every dry-cleaning business was operating at a loss. But the peo-ple working on this project understood that the reasonwhy dry-cleaning services were dying out was not a lackof demand, but rather that the quality of services wasextremely low. The essence of the project was to takedry-cleaning service to a new level of quality. Their ideasturned out to be completely justified. Diana’s clientelenow include both the wealthy, who need high-quality ser-vice, and the middle class, who cannot afford to keepbuying new expensive clothing.

The site of the first dry cleaner was renovated on aloan from BFT Bank, while the equipment was leasedthrough Finance Leasing of Saratov.

In the first year after its renovation, the first Diana drycleaner increased its turnover 20-fold. «When we firstvisited the site, there was one machine that actuallyworked and one that had been broken since the dawn oftime, and there were 14 workers working on half shifts,»recalls Yury Kozlovsky, chairman of the board at theBFT Diana Fund. «Now the site has five machines work-ing seven days a week on three shifts and more than120 workers. Other dry cleaners under the Diana labeloperate on similar principles.»

One year later, Diana opened a second dry cleaner. In1996 the company worked out a full program for reno-

Thus, the VAT exemption for small businesses

that use leasing leads to a negative financial out-

come.

Leasing companies doing business with small enter-

prises have grasped the counter productiveness of

these regulations and are trying to fix the situation. The

Moscow Leasing Company, for example — in accor-

dance with the Moscow City Government’s Statute N

1010 «On Additional Measures for the Support of Small

Enterprise in Moscow» (2 Nov. 1999) — has already

worked out a proposal for amendments to the Law «On

Value-Added Tax» that would make the VAT exemption

non-obligatory. In mid-March this year, the leasing com-

pany’s proposal was submitted to the Moscow City

Government’s Department for the Support and

Development of Small Enterprise.

The Moscow Leasing Company’s proposed amend-ments to the RF Law «On Value-Added Tax», sub-mitted to the Moscow City Government’s Departmentfor the Support and Development of Small Enterprise.

The following changes should be introduced to the RFLaw «On Value-Added Tax»:1. In Clause 1, Article 5: remove from sub-clause «ya»:«small enterprises’ lease payments in full»Add sub-clause «ya5» with the following contents:«leasing services for small enterprises in full»Draft the final paragraph in the following redaction:«Enterprises, institutions and organizations producing orselling any of the goods or services indicated in sub-clauses «f», «kh», «yu», and «ya5» of this clause maychoose not to claim the tax exemption that has beenoffered to them.»

Yury Kozlovsky, Chairman of theBoard of BFT Diana Fund

8 March-April 2000SMALL BUSINESS

vating Moscow’s dry cleaners and won the right toimplement it from the Moscow City government. A non-profit organization called the BFT Diana Fund was cre-ated to put the program into practice. Twelve dry clean-ers around the city have already been restructuredunder the program. Eight more are scheduled to bemodernized and re-equipped, while the BFT Diana Fundstill continues its work.

In order to help Diana-Trust implement its program,the Moscow City government granted the company aseries of loans. The first was issued for a period of 1-2years, while the lastwas given for a 3 to 4year period.

As mentionedabove, Diana-Trusthas also created drycleaners for its busi-ness partners incities other thanMoscow. The compa-ny’s partners are pri-vate entrepreneurswho already havesome kind of busi-ness experience.Sometimes the com-pany forms partner-ships with existingdry cleaners that need serious modernizing of bothequipment and management. The company often findsits partners through regional governments that want tofollow Moscow’s lead in carrying the dry cleaning busi-ness to a new level of quality and service. Diana-Trusthas also moved cautiously into franchising. «All of thecompanies we create have to meet our high standards,not only in the quality of their work but also in the quali-ty of their service and customer relations. Our partnershave to prove that they can meet our quality standards,»comments Mr. Kozlovsky. «We, in turn, help our part-ners not only by supplying them with equipment at themanufacturer’s price (and this includes over thirtyWestern brands), but also by supporting them at everystep in the development of their business.»

In addition to taking out loans, Diana has also

equipped new dry cleanersthrough the use of leasing. Itsigned its very first lease agree-ment in 1993 with a Saratovleasing company. Under thisagreement, Diana-Trust leasedsome equipment that was man-ufactured in a Saratov factoryunder contract with a Germanproducer. The agreement was

valued at a few hundred thousand dollars. «This wasnot leasing in the traditional sense,» says Mr. Kozlovsky.«The agreement was only signed for a one-year term.But at the time even that was acceptable to us. Theimportant thing is that the company was able to startpaying off the equipment as soon as the renovationswere completed, which reduced the start-up costs.»

The Diana holding company has also signed somelease agreements with Western leasing companies. Ithas found the conditions offered by foreign companiesto be more favorable in terms of the costs (12% APR ontop of the equipment value for a two-year period), butstricter in terms of the guarantees required. In order todo business with Western leasing companies, Diananeeded to obtain guarantees from first-rate banks.Western banks would not give any guarantees unlessthe company first deposited the full amount of the guar-antees. «But thanks to our trademark, which by thenhad already become quite well known among Westernequipment manufacturers, we were able to reduce thesum of the deposits,» says Mr. Kozlovsky. «A supplierwho trusted us helped us out of the situation by assum-ing part of the commercial risks himself.»

Over the years, Diana-Trust has earned an excellentreputation among equipment manufacturers in Italy,Germany, Sweden and Belgium. In practice this trans-lates into support from Western suppliers, who grant thecompany certain privileges. For example, an equipmentmanufacturer will begin to fill an order from Diana assoon as it receives a 30% pre-payment, allowing thecompany to pay off the rest of the sum over the term ofthe contract fulfillment — usually about two months.Since it receives such favorable terms from its suppliers,the company is able to extend the same terms to its

Old dry cleaning equipment.

Newly installed equipment.

Diana Dry Cleaner & Laundry was established in Moscow in1993.

VOLKHOV INTERNATIONAL BUSINESS INCUBATOR

Irina Likhachova

LEASING IN THE REGIONSMarch-April 2000 9

partners when leasing them new equipment. Diana-Trust also provides technical service, guarantee andpost-guarantee maintenance and spare parts.«Companies that start doing business with us generallystay with us over the long term,» notes Mr. Kozlovsky.«We keep providing them with new equipment, sincetheir businesses tend to grow dynamically.»

Having used leasing in practice, Diana-Trust realizedhow effective it could be as a financial mechanism. Theholding company’s directors decided to expand thecompany’s financial services and to offer their partnersthe option of leasing equipment. The BFT-Diana Fundapplied for a leasing license in 1996, but because it hadbeen created as a non-profit organization, it wasrefused.

Meanwhile, more and more partners have been turn-ing to Diana-Trust to ask about the possibility of leasingequipment. Diana-Trust is trying to find some Russianleasing companies with which its clients might do busi-ness. It has been negotiating with some of these com-panies, but so far nothing has materialized. «We wouldlike to work with Russian leasing companies, but so farwe have not been able to find any that could offeracceptable terms,» explains Mr. Kozlovsky. «Russianleasing companies generally charge very high rates. Forus, this is the main obstacle to developing our leasingplans. Contracts with Russian leasing companies arecurrently rather harsh, basically not much different fromcommercial credit agreements, except for one main dif-ference: the contract period for leasing is usually moreattractive. Lease agreements in the dry-cleaning busi-ness are usually for two-year periods, due to the equip-ment’s depreciation rate.

Having both the complexities of the Russian leasingmarket and the heightened demand for leasing servicesin mind, Diana Holding Company has once againreturned to the idea of creating its own leasing compa-ny. The company has created a specialized subsidiary

called Diana-Finance, for which it will try to obtain aleasing license. It plans to submit the necessary docu-ments as early as this April. According to Mr. Kozlovsky,the company must create such a subsidiary in order toobtain the special tax breaks (on profit and propertytaxes) granted to leasing transactions. «Even if we’retalking about equipment for our own chain, it’s stillcheaper to lease it through a leasing company than tobuy it outright with working capital or borrowed funds.The same is true for our clients. We would like them totake advantage of the possibilities that leasing schemesafford. Moreover, we already have fairly extensive con-tacts with a variety of banks. We believe that we canoffer leasing services on more favorable terms, since wehope to obtain more favorable loans. We hope it worksout.»

Contact telephone: (095) 335-7744, 335-1069, 335-1095, 335-7183.

Before the renovation, the customer was «fenced off» from thedry cleaner by a wall with just one small window. The renovationbegan with the removal of this wall.

The Leasing Courier regularly acquaints its readers

with the activities of leasing companies working specifi-

cally with small and medium-sized businesses. In this

issue we will be featuring a company that is notable

because it specializes in micro transactions with individ-

ual entrepreneurs and very small businesses. In this

article we will focus on micro leasing.

Volkhov is a small Russian city with a populationof 50,000 people situated in the LeningradRegion, about 120 kilometers from St.

Petersburg. The city’s biggest enterprise is its aluminum

factory, but is also home to a number of other, smallerbusinesses, such as a furniture factory, a milk factoryand a mixed-fodder factory. The number of workers atthese factories has fallen dramatically over the last tenyears. As a result, many residents have started up theirown businesses. The number of people working in smallor medium-sized enterprises doubled each year from1993 to 1995. At the same time, there was not a singleorganization in the city that specialized in consulting ser-vices for new entrepreneurs, training, or finance. Therewere no organizations working to develop small andmedium-sized business in the region, in spite of theclear need for these services.

Thus the Volkhov Business Incubator was created in1995, on the initiative of the local municipal governmentand the Alliance of American and Russian Women. Theorganization set itself the task of developing a completepackage of services for small business. In addition tofulfilling the functions of a traditional business incubator(consulting, office space and office services for begin-ning entrepreneurs), the organization also had to serveas a training center and provide financial assistance toentrepreneurs in order to promote business develop-ment in the region.

For the first three years of its activity, the VolkhovskyBusiness Incubator was financed on a grant from the USAgency for International Development (USAID). Thegrant covered the organization’s operating costs andenabled it to purchase the office equipment it needed,The municipal government also granted the organizationa 49-year operating lease on a 1,800 sq. m. building andexempted it from all local taxes. Once the grant moneyran out, the incubator has survived on revenue from itstenants, fees for its training services, and commissionsfrom its financial services, which include leasing.

In addition to consulting and training programs, thebusiness incubator also provides financial assistance toentrepreneurs. It accomplishes this through its leasingprogram, for which it obtained a leasing license in 1996from the RF Ministry of the Economy. Grant money fromUS AID was used to set up the initial leasing fund. Whenthe grant expired, the business incubator obtained aloan from the US-Russia Investment Fund (TUSRIF).

Most of the incubator’s clients for its leasing programsare private entrepreneurs and small businesses from St.Petersburg and the Leningrad region, as well as farmersfrom the Volkhov area and other cities and towns of theLeningrad Region.

This program is unusual in that the value of the leasedequipment can range from $400 to $25,000. The leaseterm is usually two years. Clients can lease any type of

equipment for manufacturing, retailing or office use, aswell as vehicles or farming equipment. Most of theleased equipment is made in Russia.

Used equipment is also sometimes leased. No collat-eral is required for leasing transactions. Advance pay-ment ranges from 12.5 to 25%, depending on the valueof the equipment, while the interest rate varies from 20-25% APR in US dollars. Payments are made monthly atthe exchange rate set by the RF Central Bank. TheVolkhov Business Incubator insures the equipment, forwhich it collects payments from the lessee. Another spe-cial feature of the program for individual entrepreneursand small businesses is the relatively short reviewprocess for leasing applications. Decisions are made onwhether or not to finance a given project within twoweeks once all the documents have been submitted.

In order to take advantage of the program, potentialclients must attend an information seminar and learnabout all of the conditions for leasing transactions. Theseminars, which include a general explanation of theleasing mechanism and the terms for doing business withthe Volkhov Business Incubator, are held every week inVolkhov and St. Petersburg.1 An entrepreneur can alsohand in some preliminary information about his/her busi-ness and the expected value of the lease agreement. Atthe seminar, entrepreneurs receive a sample businessplan and a list of all the documents that must be submit-ted with an application. As soon as these documents arecollected they are passed on to a business consultant,who analyzes them and asks additional questions forclarification. After representatives from the business incu-bator have met with the client and examined his/her busi-ness on site, the application is sent to the loan committee,which is composed of two representatives from theAlliance of American and Russian Women and two rep-resentatives from the Volkhov Business Incubator. If thecommittee approves the application, the parties concludelease, sales and insurance agreements.

Since the leasing program began, the business incu-bator has financed 80 deals. Forty percent of thelessees were involved in trade, 30% in services, 15% inindustry, and 15% in agriculture. The Volkhov BusinessIncubator now has 50 active agreements.

In 30% of the agreements, the lessees have alreadyfulfilled all of their obligations and acquired full owner-

1 For complete schedule of leasing seminars offered by theVolkhov Business Incubator, please, visit its Web site athttp://www.vbi.ru

Since it started offering entrepreneur training pro-grams, the Volkhov Business Incubator has con-ducted 174 business seminars, attended by more than2,100 residents of Volkhov and the Volkhov area, aswell as Kirishi, Tikhvin, Kirovsk and NovayaLadoga. One thousand five hundred and eighty-fivewomen, 394 managers, 45 artists, 640 unemployedand 249 students have participated. Over 4,037entrepreneurs have received one-on-one consultingat the Volkhov Business Incubator.

10 March-April 2000LEASING IN THE REGIONS

Igor Gruzdev, General Director of the Volkhov InternationalBusiness Incubator.

Over the past four and a half years the VolkhovBusiness Incubator has helped create 126 new busi-nesses with 436 new jobs, as well as assisting 905existing businesses with a total of 3,270 employees.

LEASING ABROADMarch-April 2000 11

ship of the property. Late payments occurred with only2% of the organization’s leasing portfolio. One agree-ment had to be terminated prematurely due to thelessee’s insolvency, but the lessee returned the leasedproperty voluntarily, and the Volkhov Business Incubatormanaged to resell it on the secondary market.

Not all of the business incubator’s lessees do busi-ness in Volkhov. Lessees also come from St. Petersburgand fifteen other cities in the Leningrad region. TheVolkhov Business Incubator plans to double the number

of its clients to 100-120 by the end of the year. This willbe made possible by support from TUSRIF, which grant-ed the program a two-year loan for leasing activities.The business incubator also plans to coordinate its cur-rent entrepreneur training programs with its leasing pro-gram in order, first of all, to promote the understandingand advantage of leasing and, second, to improve thequality of the leasing applications it receives.

Contact tel.: (81263)-26-326

IFC AND THE LEASING SECTOR

Gail Bowkett,IFC Leasing Development Group

«To promote private investment in developing coun-

tries, which will reduce poverty and improve people’s

lives»

The mandate of the IFC, as a member of theWorld Bank Group, is to support the develop-ment of the private sector in developing

economies. Within this context, the IFC emphasizes thedevelopment of financial markets, through projectsworking with both bank and non-bank financial institu-tions. Because leasing is a vital component of a healthyfinancial sector in emerging economies, the leasingindustry is strategically important to the IFC. IFC beganits leasing activity in 1976, with its first investment in aleasing company, the Korea Development Leasing Co.(KDLC). Since that time, the IFC has accumulated asignificant amount of experience and expertise in thedevelopment of leasing in various countries, throughtechnical assistance programs and investments.

As of October 1999, the IFC’s total portfolio of leasingrelated investments totalled $431 million US, which rep-resents approximately 31% of IFC’s overall investmentportfolio. The distribution by country of IFC’s leasingportfolio is as follows:

It is interesting to note that three countries (India,Pakistan, and Turkey) account for over 50% of IFC’stotal leasing portfolio. Several investments were madein each of these countries over a period of 15 years(from 1983 - 1998), which is indicative of the growthand development of the leasing sector in these coun-tries.

IFC investments1 typically involve equity investment, aform of loan, or a combination thereof. Approximately13% of IFC’s investments are held in the form of equity,while the remainder is in the form of loans. The averagesize of an equity holding in leasing companies isapproximately $1.4 million, and the average loan isapproximately $7.5 million US.

The goal of IFC investments into the leasing sector ofdeveloping economies is to stimulate investment activi-ty in the economy, increase the availability of differentfinancing mechanisms in the market and to stimulateeconomic growth. In many countries where IFC hasmade an investment, that investment is accompanied orpreceded by a technical assistance project to assist thegovernment in developing legal frameworks conduciveto the development of the leasing sector, and to provideexpertise on the leasing mechanism itself.Approximately 60 such projects have been undertakenby the IFC in 35 countries. During financial year 1999,technical assistance projects to support legal and regu-latory reform were under way in Russia, Ukraine,Croatia, Moldova, Lithuania and Poland.

In both its technical assistance efforts and invest-ments, the IFC promotes the establishment of certainbasic elements of a healthy leasing sector. These ele-ments include:

• legal environment,

• regulatory environment,

• tax treatment of leasing transactions, and

• accounting treatment of leasing transactions.

Other15%

Thailand3%

S&CAmerica

4%

Philippines5%

Peru5%

Indonesia7%

Colombia9%

Turkey14%

Pakistan15%

India23%

1 For more information on IFC investment criteria in the leasingsector see LC # 5 (September-October 1999), p. 20.

12 March-April 2000LEASING ABROAD

LEGAL ENVIRONMENT

Ahealthy leasing industry cannot develop without a

legislative basis for leasing activity which defines

the fundamentals of the leasing mechanism. A sound

leasing law must define the three party structure of a

leasing transaction and clearly define the obligations of

each party. The law should protect lessors by ensuring

that leased assets are not subject to claims by a

lessee’s other creditors in the event of insolvency of the

lessee. Because leased assets are, in effect, security

on a lease transaction, the rights of lessors to repossess

leased assets in the event of default must be clearly out-

lined by relevant legislation. Experience, however, has

shown that the right of repossession must not only exist

in the law, but also be supported by the legal infrastruc-

ture. Some countries have legislation which guarantees

lessor’s repossession rights, but in practical terms it

remains extremely difficult or even impossible to physi-

cally repossess the equipment. Therefore, it is critical to

ensure that repossession rights are executable.

REGULATORY ENVIRONMENT

IFC’s experience in many countries has shown that

in order to nurture a growing leasing sector, mini-

mal industry regulation should be established with the

provision that additional regulation and supervision be

introduced as the sector develops and grows. Initially,

licensing requirements together with minimum capital

requirements, will suffice to allow start up leasing com-

panies to get established and to begin their leasing

activity. Generally, leasing companies should be

afforded more flexibility in terms of sources of financ-

ing than banks, as leasing companies do not take term

deposits. This flexibility allows leasing companies to

maintain their distinction and competitive advantage

on the financial services market. Any further regula-

tions should be introduced as leasing activity begins to

grow, and should be developed in cooperation with

industry players.

TAX TREATMENT OF LEASING TRANS-ACTIONS

In many economies, leasing is used as a financial

mechanism primarily for its taxation benefits. In

order to encourage the development of leasing in devel-

oping economies, therefore, leasing should be afforded

favorable tax treatment as compared to other methods

of financing. From a taxation point of view, it is more

beneficial if the lessor can claim depreciation on the

leased asset, and therefore pay lower taxes. This tax

saving can then be passed along to the lessee through

reduced lease payments, thereby ensuring benefit to

both the lessor and the lessee. An additional fiscal ben-

efit to the lessee is also created, as the lessee can

deduct lease payments over a shorter period than the

economic life of the asset. The depreciation of the asset

should occur over the term of the lease, which general-

ly means that the rate of depreciation will be accelerat-

ed, and allows the lessor to match revenue and expens-

es. Overall, these factors serve to create incentives for

investment in equipment in an economy. However, it is

important to establish minimum lease terms, so as to

prevent abuse of leasing as merely a tax break, and to

prevent stricter rules being imposed on the industry.

In terms of indirect taxes such as VAT, taxation bodies

in most countries do not distinguish between operating

and financial leases. This results in a discriminatory

treatment of financial leases, as lessees typically pay

VAT on the full lease payment (ie. both the principal and

interest portions of the payments). The ideal situation

would be one where leases were treated similar to loans

insofar as VAT would be applicable only on the interest

portion of a lease payment. This is rarely the case, how-

ever, as most countries charge VAT on the full amount

of the lease payment.

IFC - Leasing in the Czech Republic

The IFC invested in the second foreign leasing joint venture in the Czech Republic (Czechoslovakia at the time).The investment in this joint venture «OB Sogelease» was designed to have a developmental effect on Czech indus-try by introducing international standards of credit assessment, operating policies, and accounting practices to thelocal leasing industry, while increasing the level of investment in capital equipment, and increasing the availabil-ity of financing options for Czech companies. The Czech leasing sector did, indeed, experience a tremendousgrowth after 1991, and the entry of OB Sogelease into the market increased the competitiveness of the industry.While access to local currency funding was a challenge for all leasing companies at the time, leasing has proven tobe an appropriate source of financing for developing the private sectors. In the Czech case, a regulatory, legal andfiscal environment that provided fair treatment to leasing as compared to other sources of capital investmentfinancing, was already in existence. The country’s civil code, which dated back to the pre-Communist era pro-vided necessary legal protection for lessors. As of 1998 financial leasing accounted for 28 % of the overall volume of gross national investment into Czecheconomy. It is the highest percentage among Eastern European countries and is as high as in the developed finan-cial leasing markets of Western European countries.

LEASING ABROADMarch-April 2000 13

ACCOUNTING TREATMENT OF LEASINGTRANSACTIONS

The accounting treatment of lease transactions

should be considered separately from the tax

treatment. The accounting standards in effect in any

given country will dictate what accounting treatment is

afforded to leasing transactions, based on their defini-

tion of a financial or operating lease. In some countries,

a financial lease will be afforded treatment similar to a

loan, while operating leases are treated as a rental. In

this case, the lessee holds the asset on its balance

sheet and claims depreciation. The lessor holds lease

payment receivable on its balance sheet, and records

interest income on the lease payments, on their income

statement. In other countries, all leases (regardless of

whether they are financial or operating) are treated as

leases, or rentals. This is a form of off balance sheet

financing for the lessee, as the lessor holds the asset on

its balance sheet and claims depreciation. International

Accounting Standards (IAS) recommend that the former

method for recording leasing transactions be used, with

distinct treatment for financial leases and operating

leases. Lessees, therefore, should hold the asset on

their balance sheets and claim depreciation.

Although the approaches to taxation and accounting

may contradict each other, it is important to recognize

the distinction between tax and accounting approaches.

As these two aspects are usually regulated by different

bodies, they do not necessarily have to classify leases

in the same manner. In fact, it has been found that

when different approaches are applied to taxation and

accounting in one country, the benefits of leasing are

maximized and the industry develops more quickly.

This, however, implies that two sets of financial state-

ments be maintained by the participants of a leasing

transaction.

The experience of IFC in several countries, including

the Czech Republic and Turkey (see text boxes), has

demonstrated the significance of the leasing sector in

developing economies. IFC participation in leasing

companies around the world has stimulated not only

growth in the leasing sector by assisting governments of

emerging economies in establishing a favourable cli-

mate for leasing activity, but also by attracting addition-

al investment to the sector, and increasing the amount

of financing available for leasing transactions. The IFC

will continue its support of the leasing industry in emerg-

ing economies, by implementing technical cooperation

programs and investing in leasing companies.

IFC - Leasing in Turkey

In the early 1980s, IFC was requested by the Turkish Government to provide technical assistance for the develop-ment of the financial sector. As part of this program, IFC helped formulate and draft Turkey’s leasing regulations,which were enacted in July 1985. IFC also sponsored a series of seminars and other initiatives, which helped pro-mote the concept of leasing. In 1986, IFC initiated the establishment of the first joint-venture leasing company inTurkey, and played a leading role in developing the project concept, preparing the feasibility study, and bringingtogether the shareholding group. IFC identified both the foreign technical partner, Societe Generale, and the localpartner, Isbank (a large Turkish bank). Isgen Leasing A.S. was incorporated in February 1988 and began oper-ations in June 1988. The company was set up to provide medium-term financial leasing to SMEs as well as larger enterprises for thefinancing of capital equipment, machinery, computers, and commercial vehicles. The Company undertook bothlocally produced and imported equipment, and offered leases denominated in local of foreign currencies to bothexporters and producers serving the domestic market. By 1992, Isgen held a market share of 7.2%, and ranked sixthin terms of annual volume out of 38 leasing companies in Turkey. This industry has developed beyond expecta-tions into one of the few sources of available SME financing in Turkey. In this respect, IFC’s initiative has had amajor developmental impact.

Why Leasing? From the point of view of a developing country,Leasing is:• A flexible investment instrument;• A way of broadening the financing optionsavailable to local companies;• An efficient way to finance investment in capitalassets by new companies, companies with no credithistory;• Attractive for financing small and mediumenterprises.

Over the period 1977-1998 IFC has provided USD800 million in financing to leasing companiesworldwide. IFC has conducted 62 investment projects10 of which were equity investments, 21 - in a formof loans, and 31 projects combined the two forms ofinvesting. In 19 countries IFC has participated in creating thefirst leasing company in the country.

SEMINAR «RISK MANAGEMENT IN ALEASING TRANSACTION»

The Leasing Development Group held a seminarin Ekaterinburg on March 16-17 on «RiskManagement in a Leasing Transaction.»

Directors and financial analysts from 25 leasing compa-nies and financial institutions from 15 regions of Russiaattended the seminar.

It’s no secret that in Russia today almost every kind ofcommercial activity is subject to a significant number ofrisks. Russian entrepreneurs often recognize theserisks on a merely intuitive level. Russian businessmenlack a sufficiently deep understanding of the nature ofthese risks or any systematic approach to managingthem. This is especially true of leasing. First of all, theRussian leasing market did not even begin to developuntil 1993, so no one in the market has had enough timeto acquire a wealth of practical experience. Second, thelegislative framework for leasing is still undergoing sig-nificant change. Third, leasing is a fairly complicatedfinancial operation, since it requires the participation ofat least three parties (equipment vendor, leasing com-pany and lessee).

The organizers of the seminar used the experience ofRussian leasing companies under the existing condi-tions to develop a framework for risk analysis. Duringthe seminar, leasing transactions were analyzed step bystep, focusing on the valuation of the risks that arise ateach stage. The organizers of the seminar also pre-sented mechanisms for managing and minimizing theserisks. A variety of practical exercises, simulating real sit-uations as closely as possible, were also included aspart of the seminar. By solving the given problems, par-ticipants were able to share their practical knowledge

and experience. As far as we know, this seminar, whichwill be offered again in the future, is currently the onlyundertaking that attempts a complete and detailedanalysis of risk management for leasing.

The biggest commercial risk for leasing companies is,of course, lessee default. Therefore a large part of theseminar was devoted to the topic of analyzing the finan-cial situation and cash flow of potential lessees, as wellas the effective management and business planning ofleasing companies. In preparing for the seminar, theLeasing Development Group’s consultants were assist-ed by experts from the research and consulting firm Alt,which specializes in developing business plans, analy-sis the financial position of enterprises, creatingmethodological materials and computer programs infinance and economics, and training specialists in riskmanagement.

14 March-April 2000THE LEASING PROJECT

TRAINING

Andrei Pisarenko, Deputy Project DirectorIFC Leasing Development Group

Veronika Shtelmakh, an economist with the LeasingDevelopment Group, explains how to minimize the risks associ-ated with lease payments.

During the seminar, specialists from the Leasing DevelopmentGroup provided one-on-one consultations. In the picture: OlgaShishlyannikova, an attorney with the Leasing DevelopmentGroup, and Aleksei Mankov, financial director of the SiberianLeasing Center (Novosibirsk).

The first day of the seminar ended with a presentation on theresearch project «Financial Leasing in Russia: Market Survey1998-1999.» In the picture: Karim Ahmad, Project Manager,IFC Leasing Development Project.

NEWSMarch-April 2000 15

EVENTS IN THE RUSSIAN FINANCIALLEASING MARKET

Viktor Gerashchenko, chairman of the Bankof Russia, announced at a banking confer-ence in Kazan that his agency would ease

some of the requirements currently placed onbanks. Specifically, the Central Bank will eliminatesome restrictions and create benefits for credit organi-

The IFC Leasing Development Group wasinvited by the Finno-Russian Chamber ofCommerce (FRTP) to participate in a round

table discussion entitled «The ‘Law on Leasing’:Western Business Perspectives on The Prospectsfor Leasing in Russia». The purpose of the round tablewas to acquaint members of the FRTP (both Finnishand Russian companies and financial institutions) withsituation of the Russian leasing market and the oppor-tunities for using leasing in business in Russia.

The round table included representatives from the IFCLeasing Development Group, the Russian associationof leasing companies Rosleasing, the consulting firmErnst & Young and the leasing companies RG Leasingand Deutsche Leasing Vostok. The IFC LeasingDevelopment Group presented an overview of trends inthe Russian leasing sector since the financial crisis ofAugust 1998. These trends were revealed in the

Group’s research project «Financial Leasing in Russia:Market Survey 1998-1999». The Leasing DevelopmentGroup also familiarized round-table participants with for-eign companies’ leasing experience in Russia, both inpartnership with Russian leasing companies or throughtheir own subsidiaries.

Experts from Rosleasing presented an overview ofRussian leasing legislation and shared the experienceof their member insurance companies with insuring risksunder lease agreements. The Russian leasing compa-nies related their own experience and explained someof the difficulties that are frequently encountered in theRussian leasing market. The representatives from Ernst& Young focused on tax issues, hard currency regula-tions and customs procedures for equipment importedto Russia under crossborder lease agreements. Theirviews on these subjects will be presented in the nextissues of the Leasing Courier.

In addition to the training on risk management tech-niques, participants also had ample opportunity over thecourse of the two-day seminar to meet colleagues fromdifferent regions of Russia, to discuss issues vital totheir business, and to establish business contacts. Theinstructors and organizers of the seminar also providedconsulting on various aspects of leasing.

The organizers compiled a collection of the papers,including presentation slides and handouts, that weregiven at the seminar. The package included all of thepractice exercises that were discussed. These materialswill soon be posted on the Group’s web site under«Training». Anyone wishing to obtain a hard copy of thematerials should contact the Leasing DevelopmentGroup directly.

The Leasing Development Group will conduct a simi-lar seminar in Moscow in the future.

PLANS

The Groups also continues to hold its training pro-grams on «The Principles of Leasing». The next

seminar will be held in Samara in late April, followed byVoronezh in May. In the meantime, the Group has start-ed developing new programs for potential lessees andrepresentatives of regional governments. In the fall, theLeasing Development Group plans to hold a series oftraining seminars for leasing consultants and instruc-tors.

ROUND TABLE DISCUSSION ON «THE ‘LAW ONLEASING’: WESTERN BUSINESS PERSPECTIVES ON THE

PROSPECTS FOR LEASING IN RUSSIA»

Irina Likhachova

PRESS SURVEY

16 March-April 2000NEWS

zations that finance leasing or issue medium-terminvestment loans. The Central Bank intends «not toapply certain existing regulations» to these organiza-tions. And while some skeptics in the banking world arealready predicting that this initiative will lead to a varietyof abuses, the majority of experts agree that it will givea new impetus to financial services in Russia. After all,financial leasing is the only way for many enterprises tominimize their expenses and keep themselves afloat.And since the majority of Russian firms find themselvesin such a condition, the potential for growth in theRussian leasing market is unlimited.

Based on materials from «Finansovaya Rossiya»,Vladimir Golubyev, «Reserves of Change, Or What

the Bankers Are Expecting», #12, March 2000

P erm Motors Joint-Stock Company hasannounced that it will begin to implement its

leasing program for PS-90A engines. Each enginecosts about US$1.5m, to be paid by the lessee uponreceipt of revenues. The same payment system is beingapplied to the Voronezh Aviation Plant for engines usedin its Il-96-300 aircraft. Company representatives havepointed out that four PS-90A engines for Il-96-300 air-craft cost only $6m, while four Pratt & Whitney enginesfor Il-96M/T aircraft cost about $25-30m. Perm Motorshas already put about 200 PS-90A engines on the avia-tion market, and over the past year and a half the priceof these engines in dollar terms has fallen by about onethird.

RBC, 23 March 2000

T he government is preparing to issue a decreeon state guarantees for the leasing of seven Il-

96-300 airplanes to Aeroflot. The decision was takenat a meeting with Vladimir Putin on 23 December 1999,and a statement was signed on 7 March 2000 detailingthe specific procedures for leasing the seven Il-96-300sto Aeroflot, as well as ten Tu-204-100s to TransaeroAirlines. The first deliveries are to begin in 2001, and thestate guarantees are to be reissued each year.Sberbank, Vneshtorgbank and Vneshekonombank willall help finance the lease. Aeroflot representatives notethat in order to finance the deal, the company will needUS$115m in loans from Sberbank at 12% APR for an 8-year term backed by state guarantees. The cost of oneIl-96-300 is approximately US$30-35m.

RBC, 23 March 2000

T he German-Belorussian joint venture MAZ-MAN and the Russian company PetroTEK-liz-

ing are to implement Russia’s first truck leasing pro-gram. The two companies signed a cooperating agree-ment on March 17 in Moscow. MAZ-MAN is a joint ven-ture of Germany’s MAN Nutzfahrzeuge AG (51%) andthe Minsk Auto Plant. PetroTEK-lizing is a subsidiary ofSt. Petersburg’s Petrovsky Bank. According toPetroTEK-lizing, the partners will work out all facets ofthe leasing program by the beginning of April. The pro-gram will enable the joint venture «to increase signifi-cantly its volume of sales in Russia.» One of the pro-gram’s conditions has already been determined: theloan term will not exceed three years. The president ofPetroTEK-lizing, Mikhail Petrov, admits that such a short

loan term will not be very attractive to buyers, but «it’shard to find longer loan periods for leasing programs».The deputy head of MAN’s representative office inMoscow, Timura Pinsky, says that MAZ-MAN intends tosell about 140 tractor trucks this year (compared to 52last year), while Mr. Petrov of PetroTEK-lizing claimsthat his company already has at least 100 orders forMAZ-MAN products in its portfolio.

MAZ-MAN started producing long-distance hauliers inSeptember 1999 for local crossborder truckingequipped with engines that conformed to Euro-2 norms.The only company in Russia that makes this kind ofmachine is Iveko-UralAZ Joint Venture. A similar jointproject between Volvo and AFK Sistema in Zelenogradis still in the earliest stages of development. In themeantime, trucking companies urgently need newmachines that conform to European highway standards.

Based on materials from «Vedomosti», VladimirMaksimov, «A First Attempt at Truck Leasing,» 20

March 2000

O n 15 March 2000, Igor Khmelevsky, an expertfrom the TACIS project «Financing

Investment Projects of Russian Small and Medium-Sized Enterprises,» gave a speech at the All-Russian Conference of Small BusinessRepresentatives in which he proposed creating aEuropean leasing company in Russia under theworking name West East Leasing (WEL). The com-pany would act as an intermediary between Russia’sregional leasing companies and Western investors.According to Mr. Khmelevsky, Western banks are willingto invest two thirds of WEL’s charter capital. The remain-ing one third could be contributed by shareholders ofRussian regional and interregional guarantee agencies(a role which could be filled by existing regional fundsfor the support of small enterprise).

Mr. Khmelevsky of TACIS also presented a newfinance plan for small and medium-sized enterprises.The essence of the plan can be reduced to the mini-mization of loan default risk under leasing plans. WELwill obtain credit lines from European banks, and per-haps Russian ones as well, to finance certain projectsselected in the regions. WEL will then buy requestedequipment from Russian and Western manufacturersand lease it to accredited Russian regional leasing com-panies. These leasing companies will then sublease theequipment to small enterprises.

Based on material from «Vremya Novostei»,Marina Borisova, «The West To Aid Russian

Leasing», 17 March 2000

R aiffeisenbank Austria (Moscow) hasannounced the creation of a new subsidiary,

Raiffeisen-Leasing LLC. This is the first leasing com-pany created by a Russian bank with 100% foreign cap-ital. According to the bank’s financial director, EvgenyTutkevich, Raiffeisenbank Austria (Moscow) intends toprovide the subsidiary with full financing. The bank willoffer financial leasing not only to the subsidiaries of for-eign companies in Russia, but also to Russian importand export companies.

«Kommersant», Kirill Yacheistov, «Austrian BankTo Take Up Leasing in Russia», 17 March 2000

NEWSMarch-April 2000 17

V neshekonombank and the EBRD have signeda general cooperation and strategic partner-

ship agreement. The agreement provides for the devel-opment of bilateral cooperation between the two bankson the Russian and international financial markets,including the countries of the CIS. In particular, theagreement stipulates the granting of inter-bank creditand bank guarantees for the realization of investmentand leasing projects.

Based on materials from Prime TASS, 17 March2000

T he National Investment Council (NIS) held aconference in Moscow at which participants

presented the Russian government with a variety oflegislative proposals aimed at reforming the avia-tion industry. In an interview with RBC, AndreiLebedev, president of the NRB, explained that the avia-tion industry has the potential to sustain significantgrowth. This growth cannot happen, however, withoutthe necessary legislative support. Members of the NISsuggest mandating the introduction of leasing, creditand payment deferral for buyers of aviation technology.They also think it essential to restructure manufacturers’debts to RAO EES and Gazprom, since producers sim-ply do not have the funds to repay their debts.Delegates at the conference nominated the joint-stockcompanies Aviastar and Voronezh Aircraft Constructionas the first companies to undergo debt restructuring.The adoption of these measures would increase rev-enues from the sale of aircraft to US$900m in the year2001.

RBC, 16 March 2000

T he Omnibend Group has announced a cooper-ating agreement with the Israeli company Inno

Wave ECI Wireless Systems Ltd. Under this agree-ment, Omnibend Group will expand the range of prod-ucts sold on the Russian market by offering Inno Wave’sfixed-line digital system Multigrain Wireless (MGW).

Omnibend Group has developed a leasing programspecifically for MGW buyers. Through leasing, cus-tomers can avoid taking out loans or making large lump-sum payments. Lease payments are divided equallyover the entire term of the agreement, funds are freedup for reinvestment in other types of assets, and an opti-mal balance between internal funds and loan capital ismaintained.

Based on materials from RBC, 28 February 2000

T he Orenburg region has placed a massiveorder with the Krasnoyarsk combine plant for

500 improved Yenisey combines. The Orenburgiteswere given a discount for placing such a large order:they will pay 600,000 rubles per combine, rather thanthe regular price of 820,000. The region has alreadytransferred 15 million rubles. Oil companies will buy 150million rubles worth of combines and lease them tofarmers in the region, giving them the option of payingfor the machines over a three-year term.

Based on materials from «Finmarket», 25February 2000

A regional leasing fund was created in Rostovfor the acquisition of farming equipment from

local manufacturers in the year 2000. The equipmentwill be leased to farmers in the region. According to theregional ministry of finance, agricultural producers willreceive 130 million rubles worth of equipment in the firstsemester of 2000. The Ministry of Finance will pay themanufacturers (Rostselmash, Salskselmash,Millerovoselmash, the Taganrog Combine Plant, and theKamensk Machine-Building Plant) 50% of the equip-ment’s value. Agricultural producers will repay theMinistry of Finance after the harvest. They will berequired to cover 40% of the payments in 2000, and theremaining 60% in 2001.

RBC, 22 February 2000

An amendment to the «Law on Leasing» whichwould abrogate the ban on combining the

functions of creditor and lessee in one person haspassed its first vote in the State Duma. The changeto Article 31 of the «Law on Leasing» gives parties toleasing transactions the right to determine the methodof deducting depreciation themselves, in accordancewith the terms of agreement and based on the principleof mutual advantage. The new law will allow lessees tomortgage their property in order to finance their projects(amendment to Article 14). The bill also gives lesseesthe right to transfer their liabilities to a third party in thecase of subleasing. A second vote on the amendmentsis scheduled for April 2000.

Based on materials from RBC, 11 February 2000

Avtobank plans to cooperate withRosselkhozbank (Russian Agricultural Bank)

on matters relating to agricultural equipment leas-ing, announced Natalia Rayevskaya, chair of Avtobank.The newly appointed director of Rosselkhozbank, YuryTroshin, is a member of the board of directors atAvtobank, added Ms. Rayevskaya.

RBC, 9 February 2000

EVENTS IN THE FOREIGN LEASINGMARKET

Leasing companies in Estonia are beginningto offer leasing services through the Internet.Hansa Liising Eesti has introduced automobile

leasing services on the Web. It will now take about 15minutes to review a lease application. Experts predictthat automobile sales in Estonia will increase by 20%this year. Uhisliising, Hansa Liising’s main competitor,plans to introduce a similar service around the middle ofthis year. Hansa Liising has announced that it intends touse the Internet to lease property as well.

RBC, 23 February 2000

Press survey prepared by Irina Likhachova

18 March-April 2000ACCOUNTING

WHEN DO SUMMING DIFFERENCESARISE?

In order to minimize the negative effects of Roubleinflation, the value of a lease agreement is oftenexpressed in a foreign currency or «conditional

monetary units», with the actual lease payments to bemade in ruble equivalents at an agreed upon exchangerate.

When a transaction related to these type of agree-ments is recorded in the accounts of the lessor and thelessee, a disparity of sums arises between the rublevalue of the amount expressed in a foreigncurrency/conditional unit on the date when the obliga-tion is recorded in the accounts, and the ruble value onthe date when the actual payment is made.1

Usually, the amount to be paid in rubles is determinedby the official exchange rate on the date of payment,unless some other date or exchange rate is determined bylaw or by the prior agreement of the parties.

GENERAL ASPECTS OF BOOKKEEPINGFOR SUMMING DIFFERENCES INLEASING TRANSACTIONS

According to accounting regulations,2 commercialtransactions must be recorded in the accounts in

the fiscal period in which they occurred, regardless ofthe time of payment; in other words, it is the momentwhen an amount is charged that matters.

In the accounts of the lessor and the lessee, leasepayments are recognized for services actually renderedin accordance with a lease payment schedule. Thisschedule stipulates the amount of the lease payments,expressed in the relevant currency, and the intervals atwhich such payments are to be made.3

According to the lease payment schedule, the lessorpresents the lessee with an invoice in which he indi-cates the amount of the payment, translated into rublesat the agreed upon exchange rate, as stipulated in theagreement. This invoice gives the lessee the right tocredit VAT to his accounts and serves as the basis for

his recording the lease payment in his accounts. For thelessor, it serves as the basis for claiming payment forthe rendering of services under the lease agreement.

If the exchange rate differs between the date whenthe lease payment is made (that is, when funds areeither transferred to the lessor’s account or deductedfrom the lessee’s, or in another manner stipulated in theagreement) and the date when the invoice was present-ed by the lessor, then the summing difference is definedas the difference between the amount of the paymentand the amount charged.

When the exchange rate goes up, the lessor obtainsa positive summing difference, while the lessee obtainsa negative one.

In accordance with the regulations that were in effectuntil 1/1/2000, summing differences were reflected inthe books under account 80 «Profits and Losses» aspart of non-sale revenue (or expenditures),4 whichdetermined their tax features. Now that theBookkeeping Statutes «An Organization’s Revenue»and «An Organization’s Expenditures» are now in effect(as of 1/1/2000), stipulating that summing differencesmust be recorded in a company’s account when calcu-lating either gains or regular expenditures, we canexpect to see changes in the tax regulations for sum-ming differences.

The current tax regulations for summing differencesare presented below.

TAXATION OF SUMMING DIFFERENCES

In calculating profit tax, a positive summing differ-ence should be included as part of gross profit,

according to generally established regulations. A nega-tive summing difference, on the other hand, does notlower the taxable base.5

The result is that the lessee must compensate for thisnegative summing difference with his own funds whenmaking a lease payment, while the lessor includes thisamount in his revenue and pays profit tax on it.

Therefore, excluding negative sum differences froman organization’s expenditures in the calculation of thetaxable base for profit tax purposes actually raises theprice of contracts if liabilities are expressed in foreigncurrency.1 Clause 6.6 of the Accounting Regulations (9/99) «An

Organization’s Revenue,» ratified by Ministry of Finance Order#32 of 6 May 1999; Clause 6.6 of the Accounting Regulations(10/99) «An Organization’s Expenditures», ratified by Ministryof Finance Order #33 of 6 May 1999

2 Clause 6 of the Accounting Regulations (1/98) «AnOrganization’s Accounting Policies», ratified by Ministry ofFinance Order #60 of 9 December 1998

3 Clause 4, Article 15; Clause 2, Article 28 of Federal Law#164-FZ «On Leasing» (29 October 1998)

SUMMING DIFFERENCES AND LEASE AGREEMENTS:ACCOUNTING AND TAXATION

Nina Zhuravlyova, accountant-auditorIFC Leasing Development Group

4 Clause 3.9 of the Instruction on Procedures for Filling OutAnnual Accounting Forms, ratified by RF Ministry of FinanceOrder #97 of 12 November 1996 (went out of effect on 1/1/2000)

5 Clause 14,15 of the «Statute on the Composition ofExpenditures...», ratified by Order #552 of 5 August 1992, line4.13 of Appendix #11 to the RF State Tax Service’s InstructionN 37 of 10 August 1995

QUESTIONS AND ANSWERSMarch-April 2000 19

This situation has a particularly harmful effect onlease agreements in which the parties have agreed tokeep the leased property on the lessee’s balance sheet.If the foreign currency rises steadily and the lease termis for a long period, the summing difference can becomequite large, resulting in a significant accounting loss.

As noted, this problem is due to existing accountingregulations.6 When the leased property is kept on thelessee’s balance sheet, the lessor records the futurelease payments as a long term accounts receivable,while the lessee records the future payments as longterm accounts payable. This amount is recorded as thevalue of the contract translated into rubles at theexchange rate prevailing on the day when the futurelease payments (payable and receivable) are recordedin the companies’ respective accounts (as stipulated inthe agreement; or, when the leased property is trans-ferred or received, or when the equipment is put intoservice). Current legislation does not provide for a reval-uation of these assets and liabilities in the event of achange in exchange rates.7

When the leased property is kept on the lessee’s bal-ance sheet, a summing difference is defined as the dif-ference between the amount actually paid and theamount charged, just as when the property is on thelessor’s balance sheet. In the former case, however, thelease payments are recorded in the lessee’s books asthe payment of a liability, while in the lessor’s books theyare recorded as the payment of a receivable (asset) atthe exchange rate established on the date when theseamounts are recorded in the companies’ accounts.Consequently, when property is kept on the lessee’s bal-

ance sheet, there is a much larger difference betweenthe amount charged and the amount actually paidbased on the exchange rate established on the date ofpayment.

According to generally established regulations, thelessor must pay value-added tax on any positive sum-ming differences, (regardless of the accounting methodused to define, for tax purposes, the revenue receivedfor services rendered under the lease agreement), sinceany funds the enterprise received in payment for goodsor services must be included in taxable turnover.8 Ifnegative summing differences arise through the «ondelivery» accounting method, previously charged VATshould not be corrected, since the date of turnover isconsidered the date when the lease payment wascharged. Under the «upon payment» accountingmethod, however, the lessor must correct previouslyentered VAT amounts.9

The lessee may off-set VAT charged on lease pay-ments from either a positive or a negative summing dif-ference, as an amount of tax effectively paid.10

In calculating the highway and the social fundtaxes, of which revenue from leasing services constitutethe taxable base, the lessor should not include the sum-ming differences which are recorded in account 80«Profits and Losses»11.

We would like to point out that, according to unofficialsources, amendments to the tax regulations for sum-ming differences are currently being drafted. As soon asthese changes are introduced, they will be reviewed infuture issues of the Leasing Courier.

6 Clause 4,8 of RF Ministry of Finance Order #15, «On theReflection of Leasing Operations in the Bookkeeping Records»(17 February 1997)

7 Accounting Regulations 3/2000, «Accounting for Assets andLiabilities Whose Value Is Expressed in Foreign Currency», rat-ified by RF Ministry of Finance Order #2n of 10 January 2000

8 Clause 1, Article 4 of the RF Law «On Value-Added Tax» (6December 1991)

9 RF Ministry of Finance Letter #04-03-11 (23 March 1999)

10 Ministry of Finance Letter #04-02-05/1 (29 April 1999),Ministry for Taxation Letter #03-4-09/44 (04 August 1999)

11 RF Ministry of Finance Letter #04-03-11 (29 April 1999).

What is them i n i m u mcharter capi-

tal required for a leas-ing company?

Current legislationdoes not stipulate anyspecial requirements forleasing companies interms of their chartercapital. Therefore, whenestablishing the sum oftheir charter capital,leasing companiesshould follow the generallegal norms that regulatecharter capital for the rel-evant type of legal entity.

If, for example, a leas-ing company has been formed as a limited liability com-

pany, then the company’s charter capital must be atleast one hundred times the legal minimum wage estab-lished by federal law for the date when the applicationfor registration is submitted.1 If a leasing company isformed as an open joint-stock company, then the com-pany’s charter capital must be at least one thousandtimes the minimum wage on the date of application.Finally, the charter capital of a closed joint-stock com-pany must be at least one hundred times the minimumwage on the date of application.2

Is leasing activity exclusive?

No, leasing is not exclusive. Legal entities engaging inOlga Shishlyannikova, anattorney with the IFC LeasingDevelopment Group, explainssome legal issues related toleasing.

1 Clause 1, Article 14 of RF Federal Law «On Limited LiabilityCompanies», 8 Feb. 1998 (31 Dec. 1998 redaction)

2 Article 26 of RF Federal Law «On Joint-Stock Companies»,26 Dec. 1995 (24 May 1999 redaction)

CHIEF EDITOR:Irina Likhachova

ARTICLES PREPARED BY:

Irina LikhachovaAndrei PisarenkoLeonid PrilutskyOlga ShishlyannikovaNina Zhuravlyova

TRANSLATION BY:Daniel Kohn

Comments, proposals, questions andsubmissions may be sent to:

IFC Leasing Development GroupGazetny Per., 5, Bld. 2

Moscow 103918

e-mail:Leasing-RussiaProject@ifc.org

Telephone: (095) 956-2161fax: (095) 956-2163

http://www.ifc.org/russianleasing

Articles from the Leasing Courier may be

reprinted in full or part if credited to the IFC

Leasing Development Group

The Leasing Courier information bulletin isdistributed free of charge as a part of theLeasing Development Project, implementedby the International Finance Corporation withfinancial support from the CanadianInternational Development Agency (CIDA)and the British Know How Fund (BKHF)

Circulation: 500 copies

I N T H E N E X T I S S U E S O F « L C »

QUESTIONS and ANSWERS A N D M U C H M O R E . . .

THEORY and PRACTICEThe Notion of a Risk andRisks in LeasingTransactions

SMALL BUSINESSDentist Clinic «Iset»,Ekaterinburg

LEASING ABROAD The Leasing Sector ofUkraine

NEWS Press Digest: Developmentsin the Financial LeasingMarkets

LEGISLATIONRegistration of a LeasedVehicle

TAXATION Tax Code Draft, Part II.

leasing may also engage in other non-exclusive types of activity.

Current legislation does, however, stipulate various conditions inrelation to the required volume of leasing activity. According toStatute on the Licensing of Leasing Activity in the Russian Federation(confirmed by RF Government Resolution #167 of 26 Feb. 1996), aleasing license can only be considered valid if the leasing companymeets certain requirements, such as the following:

• company has at least one active lease agreement;

• leasing is one of the company’s principal activities (no less than40% of a leasing company’s revenues must come from leasingoperations).3

The license authorities do not, however, look very closely at the ful-fillment of these conditions. Furthermore, failure to observe theseregulations may not be used to justify any harm to the rights, legalinterests or moral and physical well being of any citizen, nor to thedefense and security interests of the state. Therefore non-fulfillmentof the license requirements may not lead to the suspension of anissued license.4

A new version of the Statute on the Licensing of Leasing Activity iscurrently being drafted. According to the drafters, the above-men-tioned regulations will be excluded from the list of license require-ments and conditions.

Are there any special requirements for the founding docu-ments of a legal entity which acts as a lessor?

Current legislation does not establish any special regulations forthe founding documents of a legal entity who acts as a lessor. Thefounding documents of any legal entity, including one who engages,or plans to engage, in leasing, must specify the name and location ofthe entity as well as the management structure and any other infor-mation required by law for legal entities of the relevant type.5

Furthermore, according to Clause 2, Article 52 of the Civil Code ofthe Russian Federation, leasing must only be specified as the activi-ty of a legal entity in the founding documents of a non-profit organi-zation.6 Current legislation does not require commercial organiza-tions to specify their type of activity in their founding documents.

3 Clause 17 of the Statute on Licensing of Leasing Activity in the RussianFederation

4 Clause 1, Article 13 of the RF Federal Law «On the Licensing of VariousTypes of Activity», 25 Sep. 1998 (22 Dec. 1999 redaction)

5 Clause 2, Article 52 of the Civil Code of the Russian Federation

6 For more on the ability of non-profit organizations to act as lessors, see page30 in Leasing Courier #5.