30 December 2024

International Financial Lease Agreement

December 30, 2024

BRACE Law Firm ©

International trade relations involve financial flows that increasingly take the form of leasing arrangements. This mechanism has become a vital source of financing not only for individual enterprises and companies worldwide but also for various countries. Leasing operations are a critical component for developing and sustaining the economies of many nations.

When entering into an international leasing transaction, parties may face several challenges, including the correct application of legal norms, currency regulation, customs clearance, taxation, and the execution of leasing deals under sanctions. This article addresses these issues and potential solutions.

National Legal Regulation of Financial Leases (Leasing) in Russia

In Russia, the Civil Code of the Russian Federation (the "Civil Code") and Federal Law No. 164-FZ dated October 29, 1998, On Financial Rental (Leasing) (the "Law No. 164-FZ" or the "Leasing Law") currently regulate leasing transactions.

Under Article 665 of the Civil Code, under a financial lease agreement, the lessor undertakes to acquire ownership of property specified by the lessee from a vendor designated by the lessee and to provide this property to the lessee for a fee for temporary possession and use.

Law No. 164-FZ defines leasing as a set of economic and legal relations arising in connection with the implementation of a lease agreement, including the acquisition of the leased asset.

Pursuant to Article 432 of the Civil Code, a civil law contract, including a lease agreement, is considered concluded if the parties have reached an agreement on all its material terms. The legislator classifies the subject matter of the contract as a material term, along with conditions specified as material in laws and other legal acts. Furthermore, terms are considered material if one of the parties states that an agreement must be reached regarding them.

The material terms of a lease agreement include:

The subject matter of the lease agreement — data allowing for the definite identification of the property to be transferred into the lease;
The property supplier — if the lessee selected the supplier, the contract must specify the supplier; if the lessor selected the supplier, the contract must include a reference delegating the right of choice to the lessor.

UNIDROIT Convention on International Financial Leasing of 1988

With the enactment of Federal Law No. 16-FZ dated February 8, 1998, On the Accession of the Russian Federation to the UNIDROIT Convention on International Financial Leasing (the "UNIDROIT Convention"), Russia has been a party to the Convention since 1999. Consequently, this Convention is an integral part of the legal system of the Russian Federation. In addition to Russia, 19 other countries are parties to the Convention: the Republic of Belarus, Belgium, Czech Republic, Finland, France, Ghana, Guinea, Hungary, Italy, Latvia, Morocco, Nigeria, Panama, Philippines, Slovakia, USA, Tanzania, Ukraine, and Uzbekistan.

Russia acceded to the UNIDROIT Convention with a reservation regarding the application of national civil law standards instead of the UNIDROIT Convention provisions concerning lessor liability.

This reservation is reflected in Article 7 of Law No. 164-FZ, which defines the forms and types of leasing and distinguishes between international and domestic leasing. If the lessor is a Russian resident, Russian law regulates the transaction.

It is worth noting that determining which law applies to dispute resolution between parties involves significant risks. This is primarily because different legal systems may conflict, potentially rendering the law of the state chosen by the parties inapplicable.

The primary document regulating the accounting of leasing operations is Federal Standard No. 25/2018, Lease Accounting, which has been mandatory since 2022.

The Convention describes a financial leasing transaction based on the definition adopted by the European Federation of Equipment Leasing Company Associations in 1977. However, "while avoiding a precise definition of the transaction, the convention merely provides the distinctive features that must be present in such an operation."[1]

Article 1 establishes that the Convention regulates financial leasing transactions in which one party (the lessor):

Enters into a contract (the supply contract) with a third party (the supplier) based on the specifications of another party (the lessee), under which the lessor acquires plant, capital goods, or other equipment (the equipment) on terms approved by the lessee to the extent they affect its interests;
Enters into a contract (the leasing agreement) with the lessee, granting the lessee the right to use the equipment in exchange for periodic payments.

Thus, the lessor must conclude two contracts: a supply contract and a lease agreement. These two contracts are inextricably linked, as the lessee must approve the terms of the supply contract, and the supplier must be notified of the existence of or the intent to conclude the lease agreement.

Article 1 also lists three essential characteristics relevant to determining liability and the distribution of obligations among participants in a financial leasing transaction:

The lessee specifies the equipment and selects the supplier without relying primarily on the skill and judgment of the lessor;
The lessor acquires the equipment in connection with a lease agreement which, to the supplier's knowledge, has been or is to be made between the lessor and the lessee;
The periodic payments payable under the lease agreement are calculated so as to take into account in particular the amortization of the whole or a substantial part of the cost of the equipment.

The Convention applies when the lessor's and lessee's places of business are in different states and when:

Those states and the state where the supplier has its place of business are parties to the UNIDROIT Convention;
Both the supply contract and the lease agreement are governed by the law of a contracting state.

Under the UNIDROIT Convention, a place of business is understood as the establishment that has the closest relationship to the relevant contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of that contract.

In a case considered by the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (the "ICAC") involving a claim by a Dutch company against a Russian legal entity for the recovery of lease payments, it was established that none of the conditions for applying the UNIDROIT Convention were met. The Netherlands is not a party to the Convention, and the supply contract for the leased asset — concluded between the plaintiff and a seller from Germany (which is also not a party) — was not governed by the law of a contracting state, unlike the lease agreement. The lease agreement specified that quality issues for the asset were governed by German law. Consequently, the ICAC stated that the provisions of the Convention were inapplicable in that case. [2]

The UNIDROIT Convention applies to financial leasing transactions if both the lease agreement and the supply contract are concluded on or after the date the Convention entered into force for the contracting states.

The application of the UNIDROIT Convention may be excluded only if each party to the supply contract and each party to the lease agreement consents to such exclusion. If the Convention is not excluded, the parties may, in their relations with each other, derogate from or vary the effect of any of its provisions.

Questions not expressly settled by the UNIDROIT Convention are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

According to Article 1211 of the Civil Code, if the parties have not determined the applicable law, the law of the lessor's country applies.

The lessor is exempt from any liability to the lessee regarding the equipment, except where the lessee has suffered loss as a result of relying on the lessor's skill and judgment and from the lessor's intervention in the selection of the supplier or the specifications of the equipment.

The lessor, in its capacity as lessor, is exempt from liability to third parties for death, personal injury, or damage to property caused by the equipment. However, these provisions do not affect the lessor's liability when acting in any other capacity, such as an owner.

The lessee must take proper care of the equipment, use it in a reasonable manner, and keep it in the condition in which it was delivered, subject to fair wear and tear and any modification of the equipment agreed upon by the parties. Upon expiration of the lease agreement, the lessee shall return the equipment to the lessor in the condition described above, unless it has exercised a right to buy the equipment or to hold it on lease for a further period.

The supplier's duties under the supply contract also extend to the lessee as if the lessee were a party to that contract and as if the equipment were to be supplied directly to the lessee. However, the supplier shall not be liable to both the lessor and the lessee in respect of the same damage.

The lessee may not terminate or rescind the supply contract without the lessor's consent. The lessee's rights derived from the supply contract shall not be prejudiced by any variation of a term of the supply contract previously approved by the lessee unless the lessee has consented to such variation.

If the equipment is not delivered, is delivered late, or fails to conform to the supply contract:

The lessee has the right against the lessor to reject the equipment or terminate the lease agreement;
The lessor has the right to remedy its failure to perform by tendering equipment in conformity with the supply contract, as if the lessee had agreed to buy the equipment from the lessor on the same terms as those in the supply contract.

The lessee may withhold periodic payments due under the lease agreement until the lessor has remedied its failure to perform by tendering conforming equipment or until the lessee has lost the right to reject the equipment.

Where the lessee exercises a right to terminate the lease agreement, the lessee is entitled to recover any periodic payments and other sums paid in advance, less a reasonable sum for any benefit the lessee has derived from the equipment.

The lessee shall have no other claim against the lessor for non-delivery, delay in delivery, or delivery of non-conforming equipment unless these result from the lessor's act or omission.

In the event of a default by the lessee, the lessor may recover accrued unpaid periodic payments together with interest and damages.

If the lessee's default is material, the lessor may also require accelerated payment of the value of future periodic payments if the lease agreement so provides, or may terminate the lease agreement and, after such termination:

Repossess the equipment;
Recover such damages as will place the lessor in the position in which it would have been had the lessee performed the lease agreement in accordance with its terms.

The lease agreement may establish the manner in which damages are to be computed, provided that such a provision shall not be enforceable if it would result in the recovery of damages substantially in excess of those stated above.

If the lessor has terminated the lease agreement, it may no longer enforce a provision for accelerated payment of future periodic payments. However, the value of such payments may be taken into account when computing damages.

The lessor may not exercise its right of acceleration or termination unless it has by notice given the lessee a reasonable opportunity to remedy the default so far as the same may be remedied. The lessor shall not be entitled to recover damages to the extent that it has failed to take all reasonable steps to mitigate its loss.

The lessor may transfer all or any of its rights in the equipment or under the lease agreement. Such a transfer does not relieve the lessor of any of its duties under the lease agreement or change the nature of the lease agreement or its legal regime.

The lessee may transfer the right to the use of the equipment or any other rights under the lease agreement only with the lessor's consent and subject to the rights of third parties.

Lease Payments and Buyout of the Leased Asset

The Leasing Law defines lease payments as the total amount of payments under the lease agreement for the entire term of the lease, which includes reimbursement of the lessor's costs related to the acquisition and transfer of the leased asset to the lessee, reimbursement of costs related to other services provided for by the lease agreement, and the lessor's income. The total amount of the lease agreement may include the buyout price of the leased asset if the lease agreement provides for the transfer of ownership of the asset to the lessee (Article 28).

When considering case No. A40-20242/2022, the courts noted that if the lessee properly performs its obligations under the lease agreement, "the lessor will never receive the leased asset into its possession, since after the payment of all lease payments, the lessor's temporary ownership of the leased asset will terminate and the lessee will become the owner of the leased asset."[3]

Since lease payments in an international financial lease agreement are made in foreign currency, such agreements and payments are subject to currency control.

Bank of Russia Instruction No. 181-I dated August 16, 2017 (the "Instruction No. 181-I") [4] provides that its provisions extend, among other things, to financial lease (leasing) agreements.

In Russia, contracts concluded between residents and non-residents must be registered if the amount of obligations is equal to or exceeds the equivalent of:

3 million rubles for import contracts;
10 million rubles for export contracts.

According to Instruction No. 181-I, a resident must submit a certificate of supporting documents and the supporting documents themselves to the authorized bank. However, if a financial lease (leasing) contract specifies payments to be made at periodic intervals fixed in the contract (periodic fixed payments), the resident is not required to submit a certificate of supporting documents or the supporting documents to the authorized bank. In the case of other payments distinct from periodic fixed payments, the resident must submit the certificate and the supporting documents (Clause 8.5).

Under Article 624 of the Civil Code, a law or a lease agreement may provide that leased property transfers to the lessee's ownership upon expiration of the lease term or before its expiration, provided the lessee pays the entire buyout price stipulated by the contract. According to Article 28 of the Federal Law On Financial Rental (Leasing), the total lease amount may include the buyout price of the leased asset if the agreement provides for the transfer of ownership to the lessee. The buyout price is the value upon payment of which the lessee acquires ownership of the leased equipment.

A separate sale and purchase agreement for the leased asset is not required between the lessor and the lessee because, in a buyout lease, ownership generally transfers to the lessee after all lease payments are made. [5]

In the current jurisprudence of Russian courts, "the dominant view regarding the legal nature of a buyout lease agreement is the loan concept rather than the rental concept, according to which leasing is viewed as the provision of a specific financial service with title security in the form of the lessor's ownership of the asset until the lessee pays all lease payments; the lessor's economic interest lies in the placement of funds, and the total amount of lease payments made by the lessee is, in economic essence, the return of the financing provided to the lessor along with the payment of corresponding remuneration, determined as a percentage of the amount of financing provided, taking into account the duration of use of such financing."[6]

Sanctions in International Leasing of Aircraft

Due to the unprecedented sanctions against Russia, aircraft leasing is the hardest-hit segment of the leasing market. After February 2022, European states banned the supply of European-made aircraft to Russia as part of the sanctions, which dealt a severe blow to the Russian aviation industry.

EU Council Decision No. 2022/335 dated February 28, 2022, prohibited the use of EU airspace by Russian persons and companies under their control. Furthermore, foreign regulators in Bermuda and Ireland suspended the Certificates of Airworthiness (the "CoA") for aircraft owned by Russian airlines. These sanctions restricted the ability to oversee the flight safety of Russian aircraft. Following the Bermudan regulator, the Irish Aviation Authority also revoked the CoA for aircraft registered there and operated by Russian airlines.[7] According to the Air Code of the Russian Federation, operating aircraft without a CoA is prohibited. Consequently, on March 14, 2022, amendments were made to the Air Code allowing for the re-registration of aircraft from the Bermudan and Irish registries to the Russian registry and the issuance of Russian CoAs, provided the aircraft meet Russian technical requirements.[8]

In accordance with this federal law, Russian Government Resolution No. 412 dated March 19, 2022, was adopted,[9] establishing that the lessee (tenant) shall ensure:

The operation of foreign aircraft and aircraft engines in accordance with the provisions of federal aviation rules approved under the Air Code of the Russian Federation;
The maintenance and repair of foreign aircraft and aircraft engines at organizations holding a document confirming their compliance with federal aviation rule requirements;
The insurance of foreign aircraft and reinsurance of risks associated with foreign aircraft insurance with Russian insurance and reinsurance organizations.

When performing the contract, settlements between the lessor (landlord) and the lessee (tenant) are carried out in accordance with Decree of the President of Russia No. 179 dated April 1, 2022,[10] and Russian Government Resolution No. 635 dated April 11, 2022.[11]

Accounts were opened in Russian banks in the names of foreign lessors, and funds were transferred to them to pay lease payments. However, this method of settlement did not satisfy foreign lessors, who did not accept the payments due to non-compliance with the contract terms. Therefore, airlines refused to transfer payments to such accounts, as the carriers' expenses would not lead to an actual discharge of the debt.[12]

In 2025, Russian businesses will gain the right to write off such debts for foreign aircraft, as the three-year statute of limitations in Russia will expire. This is provided for by Article 250 of the Tax Code of the Russian Federation, according to which written-off accounts payable are classified as non-operating income, recognized as profit, and taxed at a rate of 25% in 2025. The Association of Air Transport Operators is developing proposals to amend the Tax Code to protect the interests of airlines, as this tax could significantly impact the financial position of Russian carriers. The initiative aims to ensure that outstanding debt to foreign lessors is not recognized as profit. [13]

Customs Aspects of International Leasing Transactions

When importing a leased asset into Russia, the temporary import procedure is most frequently used. Other customs procedures, such as release for internal consumption or processing on the customs territory, may also be used. The choice of customs procedure depends on factors such as the lease term or the obligation to buy out the asset at the end of the contract. [14]

Temporary import (admission) is a customs procedure allowing the temporary use of foreign goods on the EAEU customs territory with full or partial exemption from import customs duties and taxes.

Goods are placed under the temporary import (admission) procedure if certain conditions are met:

The goods must not be prohibited from the temporary import/admission procedure and must be identifiable by the customs authority upon completion of the procedure (except for permitted replacements of temporarily imported goods);
Partial payment of import customs duties and taxes has been made (if the goods are not exempt from such payment);
Transaction participants comply with prohibitions and restrictions;
Specific conditions for the temporary stay and use of goods fully exempt from customs duties and taxes are observed.

The duration of the temporary import (admission) procedure is two years from the date the goods are placed under it. Temporary import periods exceeding two years are established by separate decisions of the Customs Union Commission, such as Decision No. 328 dated July 16, 2010, On the Application of Tariff Preferences, Full Exemption from Customs Duties and Taxes, and the Extension of Temporary Import Periods and Application of Certain Customs Procedures for the Import of Civil Passenger Aircraft.

This customs procedure involves restrictions on the rights to use and dispose of the released goods:

Temporarily imported goods must remain in an unchanged state (except for natural wear and tear or loss);
The goods must remain in the actual possession and use of the declarant.

Certain operations are permitted to ensure safety, maintain the normal condition of the goods, and conduct corresponding tests (research, inspections). If certain conditions are met, the declarant may transfer the goods into the possession and use of another person. When property is transferred for maintenance, repair, transport, testing, or research, a separate permit from the customs authority is not required. In other situations, temporarily imported goods may be transferred to a third party only with the permission of the customs authority and provided that the third party undertakes to comply with the requirements and conditions of the temporary import (admission) procedure.

One issue when importing goods under lease agreements is determining the customs value. Decision of the Board of the Eurasian Economic Commission No. 23 dated March 1, 2021, approved the Regulation on Determining the Customs Value of Goods Imported into the EAEU Customs Territory under Rental or Financial Lease (Leasing) Agreements, which developed a legal approach to this problem.

Since the import of goods that are the subject of a rental or lease does not involve their sale for export to the EAEU customs territory, the transaction value method (Method 1) is not applied, even if the agreement provides for the possibility of a subsequent buyout.

If there is documented information about the sale for export to the EAEU territory of identical or similar goods, the customs value is determined by the transaction value of identical goods (Method 2) or the transaction value of similar goods (Method 3) in accordance with Articles 41 or 42 of the EAEU Customs Code.

The deductive value method (Method 4) may only be applied if there is documented information about sales on the EAEU customs territory of previously imported identical or similar goods.

The computed value method (Method 5) is based on information about the production of the valued goods, confirmed by commercial documents submitted by the manufacturer. Given that documents and information on production costs are generally confidential and not disclosed by the manufacturer, the use of Method 5 is possible only if the manufacturer agrees to provide documents and information on production costs to the tenant or lessee. It should be noted that the subject of a rental may be provided directly by the manufacturer, whereas a lessor is generally not the manufacturer of the leased asset.

When applying the fallback method (Method 6), the customs value of leased or rented goods is determined using reasonable means compatible with the principles and general provisions of Chapter 5 of the EAEU Customs Code (Customs Value of Goods). Reasonable flexibility is permitted in applying other methods, as established by the Rules for the Application of the Fallback Method (Method 6) approved by EEC Board Decision No. 138 dated August 6, 2019.

Note that the fallback method requires more detailed documentary evidence, and customs authorities may disagree with the customs value determined by this method.

For example, when denying a company's request to invalidate a customs authority's decision to amend information declared in goods declarations, courts of three instances concluded that the company failed to confirm the customs value of the imported goods determined by the fallback method.[15]

When determining the customs value of leased or rented goods under the fallback method (Method 6), information on the amounts of rent or lease payments may be used.

If the agreement provides for a transfer of ownership, the basis for determining the customs value is the set of payments required for the transfer of ownership.

If the agreement does not provide for a transfer of ownership, the determination of the customs value may also be based on the sum of rent or lease payments. For example, the basis may be the total expected payments over the economic life (useful life) of the goods. Differences regarding the economic life of new versus used goods must be considered, where "the entire economic life" is used for new goods and the "remaining economic life" is used for used goods.

When exporting a leased asset, it should be placed under the temporary export procedure, and subsequently:

If the lessee returns the equipment to the lessor upon expiration of the lease, it should be placed under the re-import procedure;
If the lessee exercises the right to buy the equipment upon expiration, it should be placed under the export procedure.

The conditions for placing goods under the temporary export procedure are:

The ability to identify the goods upon completion of the procedure (Article 341 of the EAEU Customs Code);
Compliance with prohibitions and restrictions (Article 7 of the EAEU Customs Code).

The duration of the temporary export procedure is not limited (Article 229 of the EAEU Customs Code), but the customs authority, based on the declarant's application and the circumstances of the export, establishes a duration for the procedure. This duration may be extended no later than one month after its expiration upon a reasoned application by the declarant in accordance with Article 171 of Federal Law No. 289-FZ dated August 3, 2018, On Customs Regulation in the Russian Federation.

The re-import procedure applies to foreign goods previously exported from the EAEU customs territory and brought back without the payment of customs duties (Article 235 of the EAEU Customs Code).

Conditions for placing goods under the re-import procedure after temporary export (Article 236 of the EAEU Customs Code):

Compliance with prohibitions and restrictions;
Submission of information regarding the circumstances of the export, confirmed by customs or other documents (typically the goods declaration filed during temporary export);
Re-import of the goods within the duration of the temporary export procedure;
Maintenance of the goods in the same condition as when they were exported, except for natural changes.

Before the expiration of the temporary export procedure, it may be terminated by placing the equipment under the export procedure, provided the equipment has not undergone capital repair or modernization (Article 231 of the EAEU Customs Code). Temporarily exported goods are placed under the export procedure without being brought back into the Union territory (Article 139 of the EAEU Customs Code).

The export procedure applies to EAEU goods exported from the territory for permanent stay outside of it (Article 139 of the EAEU Customs Code).

Conditions for placing goods under the export procedure (Article 140 of the EAEU Customs Code):

Payment of export customs duties;
Compliance with prohibitions and restrictions.

Generally, when placing temporarily exported goods under the export procedure, the rates and exchange rates in effect on the day the export goods declaration is registered apply for the calculation of export duties. Additionally, interest must be paid on the export duty amounts as if a deferment of payment had been granted (Article 233 of the EAEU Customs Code).

Taxes in International Financial Leasing

When conducting international leasing operations, participants may face tax risks. Given that international leasing involves tax residents of different states, there is a risk of paying additional taxes. In the absence of intergovernmental agreements on the elimination of double taxation, international leasing may become a financial burden for lessees rather than a tool for stimulating business and production.[16]

Under Article 146 of the Tax Code of the Russian Federation (the "Tax Code"), the import of goods into Russia is recognized as an object of VAT taxation. Upon import, VAT is collected not as an indirect tax, but as a customs payment, the calculation and payment of which are regulated by both the Tax Code and the Customs Code of the Eurasian Economic Union (the "EAEU Customs Code").

Note that when importing goods into Russia, everyone pays VAT, including organizations and individual entrepreneurs not recognized as VAT payers for domestic operations, as well as those who use tax exemptions under Articles 145 and 145.1 of the Tax Code.

Since January 1, 2015, when importing leased assets into Russia from EAEU member states, the lessee determines the tax base in accordance with Clause 15 of the Protocol on the Procedure for Collecting Indirect Taxes and the Mechanism for Monitoring their Payment during the Export and Import of Goods, Work, and Services.[17] Specifically, the tax base for a lease contract providing for a transfer of ownership is determined as the portion of the value of the goods (leased assets) stipulated by the contract as of the payment date (regardless of the actual size or date of the payment).

Under Article 50 of the EAEU Customs Code, the declarant (the person who declares the goods or in whose name the goods are declared) is the payer of import VAT. Customs declaration is performed by the declarant or a customs representative (Article 104 of the EAEU Customs Code).

Clause 1 of Article 61 of the EAEU Customs Code establishes that customs duties and taxes are payable in the member state whose customs authority releases the goods, except for transit and other situations listed in that clause.

If the contract does not provide for a buyout, the temporary import regime can be used, which allows for full or partial tax exemption under sub-clause 5 of Clause 1 of Article 151 of the Tax Code.

Under Clause 1 of Article 160 of the Tax Code, the tax base for imports into Russia is determined as the sum of the customs value, the customs duty payable, and the excise taxes payable (for excisable goods).

The VAT rates specified in Clauses 2 and 3 of Article 164 of the Tax Code (Clause 5 of Article 164) apply, i.e., 10% or 20% depending on the type of imported goods. Since this concerns leased assets rather than ordinary goods, import VAT for leased property will be calculated at a 20% rate.

If the lessee is a VAT payer, it may exercise a deduction for the tax amount paid upon import, provided all other conditions of Chapter 21 of the Tax Code are met. VAT amounts paid by the taxpayer upon import into Russia are subject to deduction if the goods (equipment) were acquired for operations subject to VAT (Clause 2 of Article 171 of the Tax Code).

A taxpayer may claim an import VAT deduction if the tax was paid by the taxpayer itself or by an intermediary for its account. [18]

Ministry of Finance Letter No. 03-07-08/337 dated November 29, 2010, also states that a lessee who paid VAT at customs upon importing a leased asset is entitled to a tax deduction.

If another person pays the VAT upon import, the Russian lessee will not be able to claim the tax deduction. [19]

Under current Russian tax law, the place of supply must be determined under Article 148 of the Tax Code to assess the tax consequences of international leasing. It should be noted that leasing is a form of rental and is therefore governed by the same rules for determining the place of supply as rental services.

The territory of the Russian Federation is recognized as the place of supply if:

The territory of Russia is the place of business of the lessee of movable property (except for land motor vehicles);
The subject of the lease is real estate (except for aircraft, sea-going vessels, and inland navigation vessels) located in Russia.

If the place of supply is Russia, the lessee must calculate and pay VAT twice: upon import of the property and subsequently upon payment of lease payments. VAT on lease payments is collected if Russia is recognized as the place of supply for the leasing services.

Thus, Russia is recognized as the place of supply for services providing any equipment for lease, and services providing real estate located in Russia are subject to VAT in any case. This point hinders the development of international leasing in Russia.

Under Article 246 of the Tax Code, foreign organizations receiving income from sources in Russia are recognized as corporate profit tax payers in Russia. Article 309 of the Tax Code defines the specifics of taxing the income of foreign organizations that do not operate through a permanent establishment in Russia but receive income from Russian sources.

Clause 1 of Article 309 of the Tax Code lists types of income received by a foreign organization that are classified as income from Russian sources and are subject to taxation at the source of payment; these include income from the rental or sub-rental of property used in Russia, including income from leasing operations.

It can be concluded from the above that the Russian lessee is recognized as a tax agent because it is the source of income payment to a foreign organization without a permanent establishment in Russia.

Under Article 310 of the Tax Code, tax on income received by a foreign organization from Russian sources is calculated and withheld by the Russian organization or the permanent establishment of the foreign organization located in Russia that pays the income. The tax is withheld at each payment of the income specified in Article 309 in the currency of the payment.

Income from leasing operations related to the acquisition and use of the asset by the lessee is calculated based on the total lease payment minus the reimbursement of the value of the leased property to the lessor (sub-clause 7 of Clause 1 of Article 309 of the Tax Code).

Based on Clause 1 of Article 310 of the Tax Code, tax on income from the rental or sub-rental of property used in Russia, including leasing operations, is calculated at the rates provided for by sub-clause 1 of Clause 2 of Article 284 of the Tax Code, namely: 25%.

If the lessor is a resident of a state with which Russia has a double taxation treaty in force, the provisions of such a treaty must be considered.

To benefit from the taxation procedure established by a treaty, a foreign company must, under Article 312 of the Tax Code, provide the tax agent with confirmation that it has a permanent residence in that country, certified by a competent authority.

The Tax Code does not establish a mandatory form for documents confirming permanent residence in a foreign state. Such documents may include certificates in the form established by the foreign state's domestic law or certificates in free form.

A document confirming the right to receive the income (which may be in the form of a confirmation letter or notice) must also be provided. This document confirms that the counterparty is the beneficial owner of the income.

If the subject of an international financial lease agreement is a vehicle, transport tax must also be paid.

Transport tax in Russia is a regional tax paid at the location of the vehicle. The location of the vehicle is the place of its registration.

Under Article 357 of the Tax Code, the persons in whose name the vehicles are registered are recognized as transport tax payers.

According to Clause 2 of Article 20 of the Leasing Law, leased assets subject to registration with state authorities (including vehicles) are registered by agreement of the parties in the name of the lessor or the lessee. The transport tax payer for an international financial lease of vehicles can be chosen by the parties at their discretion. A vehicle may also be registered abroad if it remains on the lessor's (foreign organization's) balance sheet; in this case, no transport tax will be collected in Russia.

International leasing, especially in large investment projects, may also involve political risks—indirect or direct interference by state agencies in the contractual relations of the parties or the forced interruption of such relations due to the geopolitical situation. Certainly, as with any foreign economic activity, international leasing involves currency risks arising from exchange rate fluctuations during leasing operations.[20]

This article has examined aspects that lessees may face when concluding international financial lease agreements. In current sanctions conditions, the use of international leasing has decreased significantly; however, it may resume in the future if restrictions are lifted. Nevertheless, leasing has become an equally important tool for acquiring movable property in recent decades. Leasing is an alternative method of asset financing that is attractive to those with limited cash funds.

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References

[1] Tarasova L.S. Characteristic Features of Financial Leasing in Accordance with the UNIDROIT Convention on International Financial Leasing. Journal "Current Issues of Economic Sciences", 2012, No. 26.

[2] Decision of the ICAC at the CCI of the RF dated April 28, 2014, in case No. 94/2013.

[3] Resolution of the Arbitration Court of the Moscow District dated January 23, 2023, in case No. A40-20242/2022.

[4] Bank of Russia Instruction No. 181-I dated August 16, 2017, On the Procedure for the Submission by Residents and Non-residents to Authorized Banks of Supporting Documents and Information when Performing Currency Operations, on Unified Forms of Accounting and Reporting for Currency Operations, and the Procedure and Deadlines for their Submission.

[5] "Review of Judicial Practice on Disputes Related to the Financial Rental (Leasing) Agreement" (approved by the Presidium of the Supreme Court of the RF on October 27, 2021).

[6] Resolution of the Constitutional Court of the RF No. 20-P dated July 20, 2011, and Ruling of the same court No. 222-O dated February 4, 2014; Clauses 2, 3.4, and 3.5 of Resolution of the Plenum of the Supreme Arbitration Court of the RF No. 17 dated March 14, 2014, On Certain Issues Related to the Buyout Lease Agreement; Review of Judicial Practice on Disputes Related to the Financial Rental (Leasing) Agreement, approved on October 27, 2021, by the Presidium of the Supreme Court of the RF.

[7] Kanashevsky V.A. Analytical Report "Legal Mechanisms for Overcoming Illegal International Sanctions Policy". Research carried out within the framework of the strategic academic leadership program "Priority – 2030". Website "Consortium 'Innovative Jurisprudence'".

[8] Federal Law No. 56-FZ dated March 14, 2022, On Amending the Air Code of the RF and Certain Legislative Acts of the RF.

[9] Russian Government Resolution No. 412 dated March 19, 2022, On Approving the Specifics of Performing Financial Rental (Leasing) Agreements and Rental Agreements for Foreign Aircraft Used for Flights by Persons Specified in Clause 3 of Article 61 of the Air Code of the Russian Federation, and Aircraft Engines in 2022 – 2026.

[10] Decree of the President of the RF No. 179 dated April 1, 2022, On the Temporary Procedure for the Performance of Financial Obligations in the Sphere of Transport to Certain Foreign Creditors.

[11] Russian Government Resolution No. 635 dated April 11, 2022, On the Procedure for Performing Obligations Provided for by Clauses 1 and 2 of Decree of the President of the Russian Federation No. 179 dated April 1, 2022, "On the Temporary Procedure for the Performance of Financial Obligations in the Sphere of Transport to Certain Foreign Creditors".

[12] Gavrilov V., Fedorov S. Bill Overboard: Airlines Declare Risks of Bankruptcy due to Leasing Debts. November 13, 2024. Website "Izvestia".

[13] Ibid.

[14] Arabian M.S., Popova E.V., Frank E.S. Certain Customs Aspects of International Leasing. Journal "Customs Affairs", 2021. No. 2.

[15] Ruling of the Supreme Court of the RF dated June 5, 2023, in case No. A53-19442/2021.

[16] Krzhizhanovsky K.V. Financial Rental (Leasing): Problem of Theory and Practice (International Experience). Journal "Law and Power", 2023, No. 5.

[17] Appendix No. 18 to the Treaty on the Eurasian Economic Union dated May 29, 2014.

[18] Ministry of Finance Letters No. 03-07-08/297 dated October 26, 2011, and No. 03-07-08/123 dated April 25, 2011.

[19] Ministry of Finance Letter No. 03-07-08/193 dated June 30, 2010.

[20] Krzhizhanovsky K.V. Financial Rental (Leasing): Problem of Theory and Practice (International Experience). Journal "Law and Power", 2023, No. 5.