In come cases, transactions were structured as "temporary import" (under 1 year with extensions), and other times parties entered into sale-purchase agreements (with $1 buy-out at expiration of the lease term).  The current draft law "on Leasing" is of a particular interest because, for the first time in Ukrainian legal history, it addresses the issues of leasing in both, domestic and international transactions.

The draft law defines leasing activity as "transfer of the lessor's property for the exclusive use of the lessee for a stated term", and states that specific terms must be incorporated in the underlying lease agreement.  While the lease agreement contains mutually consensual and negotiated terms, certain provision in the lease agreement are mandatory under the law, including the names of parties, description of the leased property, payment terms, conditions of return of the property, termination provisions, among others.

The aforementioned distinction between finance leasing and operating leasing is important because it carries various consequences for both parties.  The Ukrainian accounting requires in the case of finance leasing that the transferred property must included into the lessee's balance while in the case of operating leasing the property remains on the lessor's balance.  Not with standing such "balance book" entries, the ownership of the leased object always remains with the lessor.

Thus, unless otherwise provided in the lease agreement, in the context of finance lease arrangement the risk of loss or damage falls on the lessee, while in case of operating lease arrangements the risk of loss lies with the lessor.  In any event, the risk of loss is subject to mandatory insurance (unless lease agreement are secured by financial institutions or state guarantees to the lessor). Similarly, unless otherwise provided in the lease agreement, in the context of finance lease arrangement all expenses connected with the operation, maintenance, repair and insurance are paid by the lessee, while in case of operating leases, all such costs are borne by the lessor.

The draft law provides the lessor with ambiguous and virtually unenforceable right to "exercise control over the operation and purposeful use of the leasing object", and to "demand from lessee to reimburse any an all damages".  The lessor's other obligations are fairly simple, such as to transfer the leased object, to fulfill obligations under the lease agreement, accept the object if it is not purchased by the lessee, among others.

The lessee has its own rights and obligations, some of which may cause problems for foreign lessors, especially those seeking to lease ultra hazardous objects.  For instance, the lessee may demand an indemnity for losses resulting from its wrongful acts during performance of the lease agreement.  The lessee also has a right to reject the leasing object if it does not conform to the lease agreement, and, perhaps more importantly, may legally delay all payments until the lessor remedies the alleged fault with the object.

Under the draft law, lessee's obligatory lease payments may have several components, including:(i) payment covering a part of the value of the leased object subject to depreciation, but not more than 25% of its value in each payment; (ii) a sum to be paid as interest on a loan (to acquire leased property); (iii) fees to the lessor; (iv) insurance payments under separate insurance agreement.

With reference to taxation, please note that all profits earned by the lessor (and creditor) from the lease transactions are subject to Ukrainian basic rate (30%) decreased by ten (10) percent for a total of 20% profit tax.  When importing the leased objects into Ukraine under international lease agreement, payment of value added tax, customs duties, excise duties (if applicable) is effectuated by issuing a promissory note with deferred payment for the term of the lease agreement.

The draft law does not require any additional registrations of lease agreements unless the leased object is state property or the lease agreement is secured by state guarantees (in which case permission of the Cabinet of Ministers is necessary).  Please note, however, that the leased property must be registered with the relevant Ukrainian authorities, depending on the object (e.g., automobiles, ultra hazardous object, etc.)

Finally, in case of disputes, the parties may resolve their differences under Ukrainian law or, if specifically provided in the international lease agreement, any international court of arbitration.

While the draft law has provided us a skeleton of good concepts, it suffers from ambiguity.  Should the draft law pass without many edits by Parliament, the true substance of this precedent setting legislative act will be embodied by the yet non-existent instructions.