Judge's gavel


Government shows commitment to
general financial services reform. Brendan Malkin


The Ukrainian Union of Lessors (UUL)
had good reason last month to pat itself on the back. On the same
day that it hosted its first international leasing conference, it
also witnessed the registration before Ukraine’s parliamentary tax
committee of a leasing bill which aims to create a more favourable
environment for asset finance in the Eastern European country.

The association, which through its in-house
lawyer, Tatiana Fedorova, was instrumental in drawing-up the bill,
has come a long way since its formation just five years ago.

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By GlobalData

The main feature of the bill, which has to
travel through five stages before entering the statute book, is
expected to clear up discrepancies over Ukraine’s controversial VAT

At present, lessors are liable, with some
partial exemptions, for VAT payments at a series of stages during
the course of a lease. These stages are: at the point when assets
are returned at the end of leases; upon payment of interest and
commissions; and also when compensation is paid in residential real
estate transactions. The leasing bill calls for the elimination of
all these liabilities.

It also seeks to make sure lessors are not
liable for tax if they repossess assets. Currently, VAT is imposed
on assets repossessed based on their residual value, according to

Given the difficulties lessors face when
repossessing assets, it’s hardly surprising that the draft law also
calls for a reduction in the period in which lessors can “break off
their leasing agreements”, from 30 days down to 15.

Article 11 of the bill will also make it
mandatory for lessees to return assets if they fail to make regular
lease payments. Ownership rights, transfer conditions, supplier
responsibilities and warranties are all covered in the bill.


Time for a change

The timing of the draft law appears to
be significant. Ukrainian lessors, along with the bulk of the
country’s financial services providers, suffered heavy losses as a
result of writedowns, fraud and bad debt during the banking

Some of these losses could have been avoided if
a decent collections and repossession system had existed in
Ukraine. This bill will go some way, although not the whole way, to
rectifying this problem.

Corruption, bribery, fraud and inefficiency,
however, are still rife (see Reforms tackle Ukrainian lessor’s
tax problems
) and more legislation will be needed to cure the
system of all its ills.

Another issue the introduction of the bill will
raise is that, for the first time, lessors will find themselves
being properly, or at least nearly properly, regulated.

Until now, the only regulatory requirements
imposed on Ukrainian lessors were for them to register themselves
and to provide quarterly financial results.

While Western lessors are generally suspicious
of regulation, their Ukrainian counterparts, on the other hand,
regard regulation as providing them with opportunities to do
business in a market more freed of corruption and lessee

Meanwhile, although the bill is still subject
to feedback from various government ministries, as well as voting
before parliament, the chances of it succeeding seem high,
particularly given the Ukraine government’s apparent commitment for
economic reform.


Fresh oversight

Speaking at the UUL’s conference last
month, Vasyl Volga, chair of the state committee for regulation of
financial services markets in Ukraine, listed numerous regulatory
reforms currently on the country’s legislative agenda.

As well as making general comments on the need
for “maintaining high transparency in the financial services
sector”, “promotion of self regulation”, and “countering money
laundering”, he also focused on the phased introduction of
“prudential oversight” which might ultimately introduce a clutch of
new reforms, including Solvency II, Basel II, IAIS, IOPS and

Volga also emphasised the existence of a “draft
law in parliament with regards to the development of financial
markets”. A UUL spokesperson said the government has placed
financial market improvements high on its 2010-15 agenda.

Volga also appears supportive of Ukraine’s
relatively fledgling,  leasing community. A draft law has been
drawn up requiring lessors to ensure they have sufficient reserves
against bad debt, a requirement currently in place for banks.

In addition, he called for “more publicity for
leasing, the holding of annual leasing conferences, and the drawing
up of a curriculum of leasing activities”.

Nonetheless, while all these measures will
improve conditions, the fact remains they are being pushed through
without the support afforded to countries within the European

For Ukrainian leasing to reach its full
potential, Ukraine will have to clean up its tax and legal systems,
and create conditions to allow more capital to be freed up for its
financial services sector.