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. Last Updated: 07/27/2016

Little-Used Leasing Law Offers Diverse Benefits

There has been a great deal of discussion, criticism -- and, frankly, little use -- of Russian financial leasing structures to acquire fixed assets such as machinery, equipment and buildings since the issuance of government Regulation No. 633 and Finance Ministry Order No. 105 on leasing activities operations.

Despite questions concerning taxation, licensing and asset registration, the legislation nonetheless establishes financial leasing as the most economical and tax-effective way for companies in Russia to acquire fixed assets.

The Russian definition of a "financial lease" differs from the traditional Western concept. In a financial lease, "the lessor acquires property identified by the lessee from a seller and grants the lessee the temporary possession and use of this property for business purposes in return for payment." This suggests that there must be three participants: a manufacturer or seller; a lessor who must purchase and lease the property; and a lessee who must identify the seller and the property and lease it for business purposes from the lessor.

Leasing of both moveable and immoveable property is allowed, except land and mineral resources. Participants may be foreign or Russian.

Russian financial leasing combines the best elements of short- and long-term leasing, as in the West.

For the lessee it provides: off-balance-sheet financing; full deductibility of lease payments, including finance interest, which provides faster cost recovery of the asset than if it were amortized under the slow Russian rules; no property-tax cost, as the asset remains off the lessee's balance sheet; preservation of the hard-currency value of the tax deductions; the possibility to own the property at the end of the lease term.

For the lessor, financial leasing provides: accelerated depreciation under a foreign leaser's home country rules, or at 300 percent of usual Russian rates for Russian-based lessors; deductibility of financing costs; retention of ownership and greater security over the asset; potential VAT, customs and profits tax exemptions promised in future legislation; and, for foreign lessors, generally no Russian withholding tax where a treaty country is used (for nontreaty-country foreign lessors, withholding tax is limited to profit margin rather than the gross payment).

Too good to be true? There are some additional costs and headaches. They include a potential double VAT charge -- once when the asset is imported and again on lease payments -- and possible non-recoverability of import VAT where the foreign lessor is not Russian tax registered.

Nonetheless, such problems can be overcome with a little perseverance -- which can be well worth the effort given the substantial economic and tax benefits.

Scott Antel and Tanya Orobeiko head the leasing group of Arthur Andersen in Moscow.

In Russia today, there is a near absence of medium- to long-term domestic financing. Non-Russian bank financing also is difficult to obtain and incurs a substantial risk premium. Financing is further complicated by liquidity problems besetting Russian firms and by an archaic tax regime. Financial leasing offers foreign and domestic equipment manufacturers, sellers and Russian-based buyers an economical and tax-effective form of medium-term financing.