1. General Provisions

This program has been drafted in accordance with Presidential Decree No.1513/2005 "On the measures aimed to improve the investment climate in Ukraine" of 25 October 2005 approved by Resolution No.1801 of the Cabinet of Ministers of Ukraine of 28 December 2001, as well as the provisions of the State Program for Industry Development in 2003-2011 approved by Resolution No.1174 of the Cabinet of Ministers of Ukraine of 28 July 2003. 

 The strategic task of the State is to ensure a stable development of the national economy through a considerable increase of the volumes of investments, renovation of the equipment and technologies at the national companies, ensuring competitiveness of their products, small and medium business development, creation of new jobs, and improvement of the living standards of the population.

International practice has proven that leasing is an effective investment mechanism and an important component of the economic and investment policy of the state. Its share in the investments into fixed assets comprises approximately 30 per cent in well-developed market economies and 10-15 per cent in other countries demonstrating high growth indicators (in Ukraine it is only 1.2 per cent). In the countries of the Eastern Europe demonstrating high growth indicators (Estonia, Czech Republic, Hungary, Poland), the share of annual leasing market volume within GDP amounts to 2-5% (in Ukraine - only 0.25%).

As of ХХІst century beginning, the obsolescence of fixed assets at the Ukrainian companies carrying out different types of economic activity reached critical level, thus causing a drop of economic and social indicators of the country's development, a decrease of domestic products' competitiveness, an increase of technological and ecological risks, an increase of energy intensity and material intensity of production, as well as deepening of social problems. 

According to official data, during the last decade, the obsolescence rate of the fixed assets in Ukrainian companies in general, as well as in individual economic activity areas, was constantly growing and, as of 1 January 2005, reached almost 50 per cent. At that, in such industries as fishing industry, processing industry, generation and distribution of electricity, gas and water, construction sector, water-based transport, and education, the rate of fixed assets' obsolescence amounts to 60 per cent (see Table 1). According to expert evaluations, the obsolescence of fixed assets' active elements, in other words, machinery, equipment and vehicles, amounts to 80-90 per cent.

Table 1. 

Indicators Characterizing the Status of the Ukrainian Companies' Fixed Assets
at 2005 beginning ¹

Fixed assets by economic activity types	Fixed assets' obsolescence rate (%)	Investments needed to renew fixed assets' value as of 1 January 2005 (USD billion)
1	2	3
Total	49,3	562,6
Agriculture, hunting and forestry -  total including:	51,1	38,5
agriculture, hunting and related services	51,1	34,5
forestry and forestry-related services	49,6	0,5
Fishing industry	57,8	0,7
Industry - total including:	58,3	244,9
mining	49,6	37,2
processing industry	59,3	133,1
generation and distribution of electricity, gas and water	62,0	74,9
Construction	48,5	9,9
Wholesale and retail, sale of vehicles and repair services	33,7	10,8
Hotels and restaurants	33,3	2,6
Transport and communications	49,9	83,6
Financial activities	23,8	3,0
Real estate transactions, leasing out, and services to legal entities	36,8	90,9
State governance	39,8	13,8
Education	58,3	28,7
Health care and social security	47,2	16,4
Collective, public and individual services	47,1	9,8

In order to restore the value of currently existing fixed assets, the Ukrainian economy needs at least UAH563 billion worth of investments. Taking into account that the country needs not only repaired, but also new fixed assets, which would allow to provide users with new equipment and technologies and add new highly productive units to the currently existing fleet of machinery, equipment and transport, the above-mentioned amount of investments needs to be increased several times.

---

¹ According to the data of statistical collection "Ukrainian Fixed Assets". Kyiv. The State Statistics Committee of Ukraine,  2005. pp. 12, 19.

The potential demand for leasing services in Ukraine presently comprises at least UAH85 billion. In the meanwhile, as of 2005 year beginning, the leasing market volume in Ukraine reached somewhat more than UAH1 billion.

As compared to the countries of the Central and Eastern Europe, in Ukraine:

• The rate of equipment obsolescence in different sectors of the economy is too high, while the ratio of leasing to investments is too low;
• Under financial leasing, the interest and commission within lease installments are taxed with VAT, which has a considerable impact on the cost of lease services for the lessees;
• If returned to the lessor under financial leasing, a leased asset is taxed with VAT, which has a considerable impact on the lessees' wish to receive leasing services; and
• The amount of funds spent on leased assets' insurance, which may be included into total costs, is limited.

2. Factors That Restrain the Development of Leasing in Ukraine

The key factors that restrain the development of leasing in Ukraine are as follows:

• Imperfect legal framework:
  - Conflicts among individual legal acts regulating leasing activities;
  - Ambiguity in the interpretation of individual provisions of normative and legal acts as regards leasing transactions;
  - Unregulated components of leasing activities, in particular, secondary leasing issues, return of leased objects to the lessor, relations among lease participants if a leased object is damaged etc.; and
  - Unstable legislation that creates additional risks for leasing which, by its essence, is a long-term transaction.
• Insufficient integration into the international legal framework relating to leasing:
  - The National Accounting Standards related to leasing do not fully comply with the international standards; there are no methodological recommendations with regard to the majority of the National Accounting Standards; and
  - Ukraine is not a participant to a number of leasing-related international conventions.
• Unfavorable tax climate:
  - Discriminatory tax treatment in the taxation of the lessors' interest and commission with VAT under financial leasing (as compared to banks);
  - Absence of accepted tax depreciation for the leased assets belonging to production fixed assets (the third group of fixed assets);
  - Unreasonable payment of the tax (15%) on an entire lease installment going to a non-resident under international financial leasing; and
  -  Impossibility of including all funds spent on lease assets' insurance into total costs.
• Limited ability to attract funds for financing leasing operations; a non-perfect structure of the sources of leasing operations' financing.
• Insufficient financial resistance of lessors.
• Insufficient development and limited use of the leasing market infrastructure (a credit history bureau, a registry of the encumbrances to movable property, a registry of the encumbrances to real estate, and mechanisms for financial risks' insurance etc.).
• Lack of qualified personnel in the area of leasing, and a low level of leasing awareness among the representatives of the small and medium business.

3. Program Goal and Tasks

The goal of the Program is to create the conditions for the development of leasing as an efficient mechanism of investments into fixed assets' renovation in Ukraine.

The key tasks of the Program are as follows:

1) Improving civil and financial legislation on leasing issues, integrating the national legislation into the international one.
2) Improving the structure of the sources of leasing transactions' financing; creating conditions for the implementation of the mechanism for refinancing leasing transactions' portfolio.
3) Creating conditions to ensure an increase of lessors' financial resistance and capitalization, as well as an implementation of the modern risk-management systems by leasing companies.
4) Developing the leasing market infrastructure and promoting its use by the market participants.

4. Leasing Market Development Principles

The following principles should underlie the formation and development of the Ukrainian leasing market:

• efficiency - an ultimate use of the leasing market potential as regards the renovation of fixed assets (machinery, equipment, vehicles, real estate objects); implementing the most up-to-date equipment and technologies into the Ukrainian economy to ensure its competitiveness and efficiency and to satisfy vital needs of the population; 
• equality of the credit relations' participants in the financial market - ensuring equal opportunities and simplifying investors and borrowers' access to the financial services' market, preventing monopoly and discrimination of the rights and liberties of the leasing market entities; 
• protection of the rights of the leasing transactions' participants - creating the conditions (legal, social, economic, political) necessary for an exercise of the rights and interests of all leasing transactions' participants; 
• transparency and openness - providing stakeholders with sufficient and reliable information about lessors;
• controllability -  creating a reliable and efficient mechanism of recordkeeping and oversight, preventing misuse in the leasing market; and
• competitiveness - ensuring necessary freedom of the entrepreneurial activities of lessors, creating conditions for a healthy competition in the attraction of financial resources by them, and preventing monopolization of individual leasing market segments resulting from the ability of certain lessors to attract free (budget) financial resources; 

5. Leasing Market Participants

Leasing market participants are as follows:

Producers/ sellers/ suppliers of assets which may be leased - with the help of leasing they have a chance to broaden the range of their goods and services and to speed up their sales.

Lessees - the legal entities and natural persons whom leasing allows to obtain into long use the fixed assets and some auxiliary services they need promptly and at minimum expense. 

Lessors - the legal entities whose business consists in transferring fixed assets into long use and providing some auxiliary services to the lessees for a certain fee, meanwhile remaining owners of the leased assets during the lease contract term. Lessors may be:

• banks that render leasing services (financial leasing);
• non-bank financial institutions which deal exclusively with financial services and lease out fixed assets into financial lease; 
• non-financial institutions which, among other types of activity, render financial lease services, or financial and operating lease services; and
• non-financial institutions that render operating lease services.

Banks and other financial institutions (insurance companies, collective investment institutions etc.) that can broaden the range of their services and increase their client base with the help of leasing. 

The State is interested in developing leasing, insofar as it provides an investment mechanism that promotes renovation of machinery and technologies;  an increase of the economy's competitiveness; a decrease of the energy and materials' intensity of production; improvement of the ecological and technical safety of production and of labor conditions; development of small and medium business, agriculture, social sector etc.; an increase of production efficiency and well-being of the population; broadening of the taxation base, and an increase of budgetary receipts.

6. The Role of the State in the Leasing Market Formation and Development

Government policy as to the formation and development of the leasing market in Ukraine should be aimed at:

• ensuring legislative compliance by the leasing market participants;
• using uniform approaches when developing and implementing the policy as regards credit relations' participants in the financial market;
• ensuring protection of the rights of the leasing market participants;
• preventing monopolization and creating conditions for the development of a fair competition in the leasing market, ensuring equal opportunities for the access to the leasing services market;
• creating conditions for an efficient mobilization and placement of the financial resources of the financial services market participants, taking into account public interests;  
• ensuring transparency and openness of the leasing market; and
• strengthening and dynamic development of the domestic leasing market, maintaining confidence thereto, and furthering its integration into the European and international leasing markets;

Government regulation of the leasing market is carried out by way of:

• maintaining the State Registry of Financial Institutions;
• drafting and approving the legal acts, which are mandatory for the leasing market participants, and overseeing compliance therewith; 
• exercising control over the authenticity of the information provided to the leasing market participants;
• overseeing lessors' operations; and
• applying enforcement measures by the authorized government bodies.

7. Formation of the Legal Framework for the Leasing Market

A stable and favorable legal environment provides the foundation for a due formation and efficient development of the leasing market. Legislative improvement is possible only if the efforts of the leasing market participants, their associations, government bodies, donor institutions are combined through:

• improvement of the leasing legislation; and
• implementation of the system for monitoring and assessment of the impact of changes in the leasing legislation on the leasing market and economy on the whole. 

8. Program Fulfillment Monitoring

Fulfillment of the Program is monitored by an Inter-agency Task Force created under the Cabinet of Ministers of Ukraine as a standing body consisting of the heads of executive power bodies and the representatives of the public organizations of lessors. 

9. Program Fulfillment Financing

Program tasks are to be financed from the following sources:

1) Lessors' own funds.
2) Lessees' own funds.
3) Own funds of producers/ sellers/ suppliers of fixed asses.
4) Foreign investors' resources.
5) Resources of the state and local budgets (only in part relating to financing current expenditures of the ministries and agencies that have been assigned the responsibility for the performance of specific tasks of this Program). Implementation of this Program does not require additional spending from the budget.
6) Other sources, including the funds of donor organizations.

10.  Expected Results

Performance of the tasks and measures specified by the Program will promote the development of a stable, transparent and based on equal and competitive foundations leasing market in Ukraine, which will further the process of a quick renovation of the fixed assets of companies with all activity types.  

Renovation of equipment and technologies with the help of leasing will allow:

• to develop small and medium business, agriculture, social sphere and other activity areas; to ensure high economic growth rate;
• to increase the volumes of domestically produced competitive products, which are capable of replacing imported products and meet consumer market and modern ecological requirements;
• to increase productiveness and production volumes considerably;
• to introduce resource-saving technologies, to decrease the energy and materials' intensity of production;
• to improve the ecological and technical safety of production;
• to create jobs in the industries that will be renovating fixed assets through leasing;
• to raise prosperity of the workforce through an increase of the average wages in the industry;  and
• to broaden the taxation base and to increase budgetary receipts.

Implementation of modern equipment in science and research works will allow to raise the efficiency of fundamental and applied research, which will ensure entering global markets by the domestic products.

Minimization of the risks of leasing transactions' participants, an increase of investments' volumes through leasing mechanism and, consequently, a decrease of the cost of leasing transactions for their final consumers - the lessees, will become important results of the Program's fulfillment.

Upon completion of the Program, the share of leasing in the total investments into fixed assets in Ukraine should comprise between 10 and 15 per cent, and the share of the annual leasing market volume within GDP - 2 per cent. 

Appendix
to the Program for the Development
of Leasing in Ukraine
in 2006 - 2010

Activities on Program Fulfillment

Activity	Execution Period	Responsible Body/ Organization
Task 1.  Improving civil and financial legislation on leasing issues, integrating the national legislation into the international one
1) To develop a draft Law of Ukraine "On amendments to certain legal acts of Ukraine (regarding leasing transactions)" in order to amend the following legal acts: • Civil Code of Ukraine and Commercial Code of Ukraine (as related to eliminating inconsistencies and conflicts between the norms of these Codes and those of other laws of Ukraine); • Law of Ukraine "On financial leasing" (as related to improving the conduct of financial leasing transactions, as well as protecting the rights and interests of the parties to a leasing transaction).	2006	Derzhfinposlug , Ministry of Economy of Ukraine, Ministry of Finance of Ukraine, State Customs Service, Ministry of Transport and Communications of Ukraine, associations of leasing market participants
2) To develop a draft Law of Ukraine "On amendments to certain legal acts of Ukraine on taxation (regarding leasing)" for the purpose of amending the following legal acts: • Law of Ukraine "On taxation of company income" (as related to bringing norms of this Law in conformity with those of the civil legislation; introducing an accelerated depreciation mechanism for the IIIrd group of fixed assets transferred into financial lease; eliminating an excessive taxation of the non-residents that conduct leasing activities in Ukraine);    • Law of Ukraine "On value added tax" (in the first turn, as related to the regulation of taxing with VAT the interest and commission paid within lease installments under financial leasing; a decrease of the tax burden on leasing transactions, factoring; other);   • Law of Ukraine "On the financial services and government regulation of the financial services market" (in order to improve the regulation of the leasing market participants' activities); • Customs Code of Ukraine (as related to determination of the customs value of a leased asset; a decrease of the tax burden on Ukrainian entrepreneurial entities provided they carry out the programs of technical renovation and modernization of the industries, the structural reconstruction of which requires considerable financial investments).	2006	Derzhfinposlug, Ministry of Economy of Ukraine, Ministry of Finance of Ukraine, State Customs Service, Ministry of Transport and Communications of Ukraine, associations of leasing market participants
3) To bring the State Classifier of Ukraine "Fixed Assets Classification" (Fixed assets classification SS 013-97) in line with effective legal acts.	2006-2007	State Committee of Ukraine for Standardization, Metrology and Certification; Science and Research Institute of Statistics of the State Statistics Committee of Ukraine
4) To complete the procedure of accession to: • UNIDROIT Convention “On international factoring”. • UNIDROIT Convention “International financial leasing”.	2006 2006	Ministry of Foreign Affairs of Ukraine
5) To join: • UNSITRAL Convention “On the assignment of receivables in international trade”.	2007	Ministry of Foreign Affairs of Ukraine, Ministry of Economy of Ukraine, National Bank of Ukraine
6) To ratify: • UNIDROIT Convention “On international interests in mobile Equipment”. • Kyoto Convention “On simplification and harmonization of customs procedures”. • UNSITRAL Convention “On the assignment of receivables in international trade”.	2007 2008 2008	Verkhovna Rada of Ukraine, Ministry of Foreign Affairs of Ukraine, State Customs Service, Ministry of Transport and Communications of Ukraine, Ministry of Economy of Ukraine
7) To bring accounting of leasing transactions in Ukraine in full compliance with international standards: • To bring National Accounting Standard NAS 14 “Lease” in conformity with international standards • To draft methodological recommendations on the application of NAS 14 “Lease”	2007 2007	Ministry of Finance of Ukraine
Task 2. Improving the structure of the sources of leasing transactions' financing; creating conditions for the implementation of the mechanism of refinancing leasing transactions' portfolio.
1) To draft a by-law on the procedure for refinancing portfolios of leasing transactions through the mechanisms of the portfolios' securitization and sale	2006–2007	National Bank of Ukraine, Derzhfinposlug, Securities and Stock Market State Commission,  associations of leasing market participants, donor organizations
2) To make proposals regarding the normative regulation of the use of leasing mechanism in government investment projects to decrease their cost	2006	Ministry of Economy of Ukraine, Ministry of Finance of Ukraine, Ministry of Transport and Communications of Ukraine, other interested executive power bodies
Task 3. Creating conditions to ensure an increase of lessors' financial resistance and capitalization, as well as an implementation of the modern risk-management systems by leasing companies.
1) To draft and approve standard documents (recommendations) used by leasing companies in their activities • On the standard organizational structure of leasing companies • On the credit committee of a lessor • On the risk-management committee, and • On the procedures for decision-making as regards giving property in financial leasing.	2006 – 2007	Associations of leasing market participants, donor organizations, Ministry of Economy of Ukraine
2) To draft recommendations on conducing leasing business and the standards of its participants' business ethics	2006 – 2007	Derzhfinposlug, associations of leasing market participants, donor organizations
Task 4. Developing the leasing market infrastructure and promoting its use by the market participants.
1) To develop a scientific and practical commentary to the Law of Ukraine “On Financial Leasing”	2006-2007	National Bank of Ukraine, Derzhfinposlug, Ministry of Justice of Ukraine, associations of leasing market participants, donor organizations
2) To summarize leasing-related court decisions	2006 – 2010	Supreme Court of Ukraine, Highest Commercial Court
3) To create conditions for the training of leasing specialists: • To develop and implement educational professional programs to train leasing specialists. • To introduce an optional course on the financial management of leasing companies in one institution of higher education.	2006 – 2010	Ministry of Education and Science, associations of leasing market participants, donor organizations
4) To create conditions for the dissemination of leasing knowledge among a broad circle of leasing market participants: • To develop and implement a training program on leasing for general public. • To conduct annual surveys of the Ukrainian leasing market. • To create and maintain a specialized web-site on leasing (technical, informational and financial support included). • To establish and support a specialized publication on leasing. • To promote placement of the information and analytical data on leasing in the state mass media.	2006 – 2010	Derzhfinposlug, associations of leasing market participants, donor organizations
5) To set up a consulting center for potential and current leasing market participants	2007 – 2008	Associations of leasing market participants, donor organizations