Legal and Tax Aspects of the Replacement of the Subject of Financial Leasing

In the process of rendering services to clients working in the field of financial leasing, we are faced with various issues that arise in the process of execution of financial leasing contracts. Previously, we wrote about the law enforcement practice in the courts in relation to financial leasing. You can see our previous publication by following the link. In this article we will consider one of the important aspects of financial leasing, namely, the possibility and consequences of replacing the subject of financial leasing. With regard to the consequences, in this article we will mainly focus on the issue of the applicability of tax incentives in the case of replacement. Take for example the following case. The leasing company (hereinafter referred to as the "Lessor") and the construction company (hereinafter referred to as the "Lessee") entered into a financial leasing agreement in accordance with which the Lessor undertook to acquire the hydraulic excavator chosen by the Lessee (hereinafter referred to as the "Leased Item") in accordance with the specification specified in the financial contract leasing, and transfer it to the Lessee. In pursuance of the concluded financial leasing contract, the Lessor entered into a purchase and sale agreement with the seller of the Leasing Item for its acquisition. The lessor properly fulfilled its obligations to supply the Leasing Object of proper quality and meet the requirements of the Lessee. However, after some time after the Lessee started using the Lease Object, the Lessee applied to the Lessor with a request to replace the Leasing Item with another technique, since the technical characteristics of the Leased Item received did not meet the requirements of the works on which it is used. The lessor and the seller are in principle ready to meet the lessee, but in this connection the question arose whether the legislation of the Republic of Kazakhstan permits the replacement of the subject of leasing under a previously concluded financial leasing contract and what the consequences of such a change will be. The laws of the Republic of Kazakhstan specify cases when the leasing object can be replaced. First, according to the Civil Code of the Republic of Kazakhstan of 27.12.1994. (hereinafter referred to as the "SC of the RK"), the lessee as buyer has the right to demand replacement of the leased asset in case of its improper quality or incompleteness. Secondly, the Law of the Republic of Kazakhstan "On Financial Leasing" of 05.07.2000. (hereinafter referred to as the "Financial Leasing Law") provides for the right of the lessee to request replacement of the leased asset, in cases where the subject of leasing (i) is not delivered, (ii) is delivered with substantial delay or (iii) is delivered with unavoidable shortcomings preventing the use of the leased asset by appointment except for the choice of the seller and the subject of the leasing by the lessee. As it follows from this, the provisions of the law relating to the replacement of the leasing object can not be applied to the case we are considering, zingopoluchatelya no complaints about the quality and completeness of the resulting them leased. In addition, the Leasing Item and its seller were selected by the Lessee, and the leasing agreement did not contain any provisions that in any way altered the right of the Lessee, in contrast to what is provided for in the Law on Financial Leasing. Does this mean that the right Lessee for the replacement of the subject of leasing is restricted only by cases stipulated in the legislation? According to the authors of this article, the provisions of the legislation of the Republic of Kazakhstan governing the replacement of the subject of leasing provide for only a minimal amount the rights guaranteed by the lessee legislation on the subject, accordingly, the part of financial leasing transactions by mutual agreement may provide other bases replacing the leased asset, in addition to those provided by the legislation. And this can be done both at the time of concluding the financial leasing contract and in the process of its execution. This opinion is based on the following arguments. Neither the Civil Code nor the Law on Financial Leasing provide for a direct ban on the replacement of the leased asset in the process of executing the financial leasing contract. Civil legislation also provides for the parties' right to determine the terms of the contract at their own discretion, In addition, the law on financial leasing, which regulates the right of the lessee to replace the leased asset, is dispositive rma. That is, the parties may by its agreement exclude its application or establish other conditions different from those stipulated in it. However, the main problem that needs to be addressed when considering the question of replacing the leased asset on grounds not provided for by the legislation of the RK is not as much of the civil law as the requirements of the tax legislation. In accordance with the Code of the RK "On Taxes and Other Mandatory Payments to the Budget" of 25.12.2017. (hereinafter referred to as "NC RK") financial leasing is the transfer of property