What are leasing and a joint venture?

What are leasing and a joint venture?

1954 is considered the beginning of the lease in its modern form. Then the traditional rental gets a new feature, which gradually generates huge growth of the industry worldwide.

This is the possibility for the lessee to use accelerated depreciation of the leased asset as a tax preference.

What is Leasing?

Leasing is a common English word that has become a technical term meaning from “rent” to “leasing” in the broadest sense of the word. Leasing is a modern form of lending that offers more advantages than a bank loan.

Leasing is the most direct way to acquire the necessary goods or equipment without investing large sums of money at once. It is a contractual arrangement in which one party, called the lessor, owns an asset, grants the right to use that asset to another party, called the lessee, for a specified period and under a specific payment scheme. Reference: “Complete revocation of rights: complete refusal of direct state intervention”,

After the expiration of the term of the contract, the lessee becomes the owner of the leased asset.

Advantages of leasing

Leasing offers the following advantages:

  • The advantage of getting the goods without having to invest a lot of money at once.
  • The desired technique is obtained against a low initial investment.
  • Leasing allows flexibility in terms of payment schemes.
  • Ability to plan costs.
  • Release of operating capital to invest the free funds in the development of the main activity.
  • Opportunity to buy better equipment.
  • Leasing also provides tax policy benefits.

International leasing

International leasing does not differ significantly from that within the country.

However, there are differences and they can be found in the following moments: at least one of the contractors is a foreign person; the goods – subject of the lease cross at least one national border; the currency with which it is paid is foreign to at least one of the parties to the contract. Reference: “Management contract and complete withdrawal of rights”,

In general, the advantages of the leasing transaction are concluded in the fact that the transaction price is paid an annuity. This frees the lessee from the compulsion to invest large lump sums in tangible assets.

Given the relatively expensive loan, this fact is considered an excellent condition for business internationally. Leasing is also suitable for small and medium enterprises or for those who are now starting their business.

The disadvantages of leasing

The disadvantages of leasing are the following elements of its specifics:

A purchase clause may be present in the contract, then the lessee becomes the owner of the property at the end of the period.

However, this can be a trap for him – if the product is depreciated or is obsolete and depreciated. Then it turns out that the lessee has paid only for the rent of the specified asset.

The second negative feature is that the sum of the lease installments necessarily exceeds the price of the leased object;

The third negative feature of international leasing for Bulgarian companies is that the price is usually determined by the lessor in foreign currency and there is always a danger of depreciation of the lev against this currency.

According to International Accounting Standard 17 Leasing, whether a lease is a finance lease or an operating lease depends on the nature of the transaction and not on the form of the lease.

Examples of situations in which a lease is generally classified as a finance lease in international law are:

The lease transfers ownership of the lessee’s assets at the end of the lease term;

The lessee has an option to purchase the asset at a price that is expected to be significantly lower than the fair value at the date the option becomes exercisable, and at the inception of the lease it is largely certain that the option will be exercised;

The term of the lease covers most of the economic life of the asset, even if the owner has not been transferred;

At the inception of the lease, the present value of the minimum lease payments is almost entirely equal to the fair value of the leased asset; and

Leased assets have a specific nature, and only the lessee can operate them without making significant modifications.

The indicators for situations that individually or in combination could also lead to the classification of a leasing contract as a financial lease are:

If the lessee may cancel the lease, the lessor’s losses related to the cancellation shall be covered by the lessee;

Gains or losses on fluctuations in the fair value of the residual value remain with the lessee (for example, in the form of a rental discount equal to most of the proceeds from the sale at the end of the lease); and

The lessee has the opportunity to extend the lease for a new term for rent, which is significantly lower than the market rent.

Economic aspects of international leasing

The other economic aspects of international leasing are expressed in the emergence and implementation of economic relations between entities of different nationalities. The purpose of the transaction is to obtain economic benefits.

Another important feature of international leasing is that it must involve more counterparties than the main participants.

The physical transfer of ownership, risk, and costs of delivery of goods from the lessor to the lessee undoubtedly implies the inclusion of additional participants – intermediaries, insurers, banks, appraisers, mandatory customs, and other government institutions.

Each of these participants performs one or more of the many activities required to enter into a lease.

Concluding the leasing contract

The initiative for concluding the leasing contract, as a rule, belongs to the lessee. The beginning of the leasing transaction is set with studies of possible options.

Due to the specifics of international leasing, it is here that additional participants need to be included, which conveys the special nature of leasing activity internationally. Such participants are:

Companies with a purely foreign trade activity, which are engaged in research and study of international markets, find suitable clients or partners, formulate and prepare contracts.

Companies that are engaged in transport activities internationally and perform the physical delivery of the leased object to the company – lessee.

Insurance institutes that share with the parties to foreign trade leasing transactions the risks of occurrence of certain events;

Forwarding companies, which for a certain fee organize the physical delivery of the goods or equipment to be leased; this organization includes – transport, insurance, paperwork, customs procedures, etc .;

Banks that operate not only on the territory of the country but also have branches outside it, through which the payment of installments will be made.

Types of leasing contracts

Export leasing

A tripartite transaction in which the lessor buys the property from a producer in his country and gives it to a lessee from another country

Leverage leasing

A lease in which the lessor leases the asset to the lessee but uses a third-party loan to purchase it from the manufacturer

lease of the supplier

Leasing, in which the manufacturer sells the property to a leasing company and immediately receives its value.

At the same time, the manufacturer leases the same asset and subleases it to the final lessee.

The main purpose of this type of leasing operation is the sale of equipment in low solvency markets

Wet leasing

Leasing transaction in which the lessor bears the additional costs of maintenance, repair, insurance, staff training

Net leasing

Leasing transaction in which the lessee assumes all risks and obligations related to the ownership and operation of the property – maintenance, repair, insurance, staff training, supply of raw materials, management of the production process

Reverse lease

The essence of the leasing operation consists in the sale of the asset (the most commonly used equipment) by its owner to the lessor, who in turn leases it to him.

Residual (liquidation) value

The estimated selling price of the asset at the time of the expiration of the accepted term for its practical use in the enterprise, reduced by the estimated costs of liquidation.

When the residual value is up to 5% of the carrying amount of the asset, it is not taken into account in determining the depreciation amount

Operating (operating) leasing

Leasing that does not meet the conditions for financial. Operating leases are applied to specialized equipment, subject to rapid moral depletion and with a well-developed secondary market.

Lease payments only partially cover the lessor’s costs, so after the lease expires, the asset is in most cases sold or re-leased.

Direct leasing

A lease in which the lessee receives a right from the lessor to use an asset that it did not previously own

Transit leasing

A lease in which the lessor, the lessee, and the supplier of the object of the lease are from three different countries

Financial leasing

A lease that “transfers substantially all the risks and rewards incidental to ownership of the asset” to the lessee

Hire purchase

Lease agreement with a purchase option at the end of the leasing period.

Stages of the leasing transaction

The leasing transaction goes through the following stages:

Establishing the relationship between the lessee and the lessor. Given the peculiarities of international law, at this stage are included companies that are engaged in consulting or drafting international agreements;

Coordination of the conditions between the recipient and the lessor; the lessor uses its funds to explore the recipient’s capabilities, usually by hiring consultants or other companies from the country where the lessee operates;

Upon reaching a certain agreement between the contractors, the contract is signed. It reflects many mandatory parameters, as well as clauses by agreement between the parties.

This stage is known as leasing processing and is the most complex stage, in terms of being subject to the sources of international trade law.

The contract must mention the term of the lease, the subject, and type of equipment, the currency through which the payment will be made, the bank – intermediary of the transaction, the insurance company with which it will work, etc.

The delivery and delivery of the object of leasing follows. This stage is the last in this type of relationship and is again associated with several documents – these are handover protocol, which prepares the lessee upon receipt of the leased object, the documents to the lessee’s bank, through which the first payment will be made, etc.

Parties to the lease agreement

The parties to the lease agreement are the lessee and the lessor. Lessors can be:

Financial institutions, usually banks;

Manufacturing, industrial or construction companies with experience in international transactions;

Specialized leasing companies that are closely specialized or with a universal nature of the activity. They can also specialize in leasing in a particular country, region, etc.

Physical delivery in international leasing

Another interesting point in international leasing is the actual delivery of the equipment. If the delivery is subject to contractual relations, then the installation or commissioning itself is at the expense of the lessee or the supplier.

An obligatory condition for international leasing is insurance or the so-called export insurance. The risks covered by this type of leasing insurance are the following:

  • Insolvency of the foreign recipient, meaning:
  • Declaring the recipient bankrupt or initiating a bankruptcy procedure;
  • Announcing the recipient in liquidation or opening a liquidation procedure;
  • Other court or out-of-court settlement of the obligations of the foreign recipient.

Delay of payment due under the contract by the recipient more than the specified waiting period for reasons not related to the fulfillment of the terms of the contract by the lessor.

Non-trade risks are also insured. These are the risks associated with the country of the foreign recipient/lessor. They include:

  • Occurrence of political events, such as war, coup, civil unrest, riots, strikes, embargoes, as well as natural disasters or other events with comparable effect;
  • Announcing a general moratorium on payments;
  • Changes in the regime of foreign currency payments;
  • Adoption or amendment of normative acts or decisions of the government or another state body;
  • Confiscation or nationalization;
  • Refusal to pay or delay the payment due for more than 3 months, when the lessee is a foreign state or a foreign state body;

Restrictions or prohibitions on the export of goods or services in fulfillment of obligations under international agreements.

What is a Joint Venture?

The world market economy and the course dictated by it towards open active participation in today’s transnational, global economy necessitate the search for foreign productive investments for our country.

They can quickly and effectively help solve the structural problems of our economy, which have become particularly acute at the present stage of development.

These are structural and technological renewal, production restructuring and capacity modeling, increasing exports, entering new markets, changing the management of business units, etc. Reference: “Management forms for company management”,

Practice shows that joint ventures with foreign companies or their subsidiaries most quickly and efficiently. accelerate the process of building market structures in the economy.

This is a matter of demonopolization of many economic spheres, increasing the role of competition, establishing the criteria of the international market in domestic economic activity.

In the world market economy, mixed entrepreneurship is a regular form of economic activity.

In some countries, there are prerequisites for strengthening the interest of foreign companies for investment such as favorable legislative and economic regime for the operations of foreign companies, built capacity at a relatively good technological level, skilled labor, availability of production experience, and scientific potential and others.

The establishment of a joint venture

The establishment of a joint venture (J.V.) is a reliable form of industrial and commercial cooperation that will lead our country to meet the requirements of international standards and markets.

In recent years, several important elements of development in this area have been noticed in terms of legislation, organizational structure, and companies.

The treaties establishing J.V. should also include clauses for marketing activities, as access to the relevant markets is one of the main factors prompting companies to enter into cooperation agreements.

The nature of the marketing situation depends to a large extent on the type of joint venture agreement or the types of J.V.

Types of joint ventures

There are four types of joint ventures:

  • Licensing (licensed production),
  • Production contract,
  • Management contract,
  • Joint ownership.

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