Following recent UK tax changes, cross-border leasing out of the
UK has become increasingly popular, especially within the European
Union. By definition, cross-border transactions involve more
than one jurisdiction and each jurisdiction will have its own body
of law. Therefore the interrelationship between the laws of
the different jurisdictions of the parties to the transaction
alongside the proper law of the contract itself, and an analysis of
the country’s tax position are important considerations. For
example, a foreign lessee subject to withholding tax will have to
keep back part of his rent and pay it to the local tax authorities
on account of the tax liability of the lessor. It may also be
difficult to make use of this advance payment of tax if the lessor
is not otherwise taxable in the country concerned.
Law and jurisdiction
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Parties entering a cross-border leasing arrangement may have
different interpretations of the contract and its
consequences. This is often the situation when a party from a
common law jurisdiction (the UK and Ireland) contracts with a party
from a civil law jurisdiction (Continental Europe). It is
therefore vital to establish the proper law of the contract and
which courts are going to deal with any dispute. This is not
always easy to do when each of the parties is domiciled in a
different jurisdiction, payments are being made from one
jurisdiction and settled in another, and the assets are being
supplied from a third or fourth jurisdiction. For these
reasons, there should always be a choice of law and jurisdiction in
the contracts. Nonetheless, issues relating to ownership,
security rights, capacity and misrepresentation may still be
governed by the law of the other party. The incorporation of
international arbitration provisions in cross-border lease may be a
compromise where English or New York law cannot be agreed,
especially with leases to more exotic jurisdictions.
Enforcement
A judgement will probably have to be enforced in the
jurisdiction where the lessee or asset is located. While EC
Council Regulation No. 44/2001 allows for the recognition and
enforcement of decisions in civil and commercial matters in the
courts of other EU member states, there may be more of a problem in
less developed countries.
Sovereign immunity
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By GlobalDataSome lease transactions involve sovereign entities as
lessees. Depending on the country in question and its
politics, political risk insurance may be desirable. In
extreme cases, the indebtedness of a country could lead to leases
with sovereign bodies being rescheduled alongside its other
debts. An important additional consideration is the concept
of sovereign immunity from both jurisdiction and enforcement.
This doctrine has been rather eroded by virtue of the increased
involvement of state bodies in commercial activities. It is
particularly prudent to appoint an identified agent for service of
legal proceedings. Consideration should also be given as to
whether it is appropriate to include a warranty to the effect that
the action being taken by the body in entering the lease represents
a commercial act rather than a public act.
Differences between laws and taxation treatment have
historically worked in favour of leasing transactions. In
particular, most countries understand the need to honour rights of
the owners of assets while some do not enforce security on public
policy or other grounds. However, jurisdictional uncertainty
can outweigh any perceived benefits. There have been appeals
for greater international standardisation, and further conventions
such as the Cape Town Convention in February 2006 – which intended
to facilitate the cross-border financing and leasing of aircraft,
helicopters and aircraft engines to ensure greater recognition and
protection under cross-border transactions. Any increase in
cross-border legal certainty will ultimately lead to considerable
economic benefit with an overall reduction in the cost of
transactions.
