The FINANCIAL — Since 2004 when the first 4 leasing companies were established in Georgia the market hasn’t experienced any significant growth.
Nowadays there remain only 3 such companies, those of Georgian Leasing Company (Bank of Georgia), TBC Leasing and Alliance Group.
Conversely since 2000 the Azerbaijani leasing market grew 22 times due to changes made in the legislation. Growth has been occurring in Armenia as well; IFC being very active in this direction providing capital to leasing.
There are already 21 large leasing companies found in Azerbaijan and the market is worth 150-200 million USD. Agriculture and construction take the largest share in the leasing business.
In Georgia legislation changes made in early 2000 had to be altered once as they were a stumbling block to economic growth – as was observed by invited USAID EPI experts.
Rafael Castillo-Triana, born in Columbia, who has more than 13 years of experience in leasing practices worldwide has been visiting Georgia during the last couple of weeks.
He was invited by the USAID Economic Prosperity Initiative on Georgia to provide consultancy to the Georgia Revenue Service on the tax-code and civil code and to make necessary changes to it.
The adoption of the new law will pave the way for continuous capital formation and increased foreign investment in leasing companies and equipment vendors.
The suggested changes in the Civil Code and Tax Code will resolve the current disparity and balance the rights of all parties involved in leasing transactions.
“Georgia now has the unique challenge and opportunity to bring the leasing business back on track,” said Rafael Castillo-Triana to The FINANCIAL.
“There are several opportunities, those of increased investment, higher job generation, access to technology, productivity improvement, and economic development,” he said.
“Under the new legislation that we’re in the process of drafting – the economy of Georgia will grow in a balanced way, the revenue service of Georgia will increase its revenues and the economy at large will make capital available for SME business in Georgia,” said Triana.
“When I came to Georgia it was really a shock for me when I found that Georgian farmers didn’t have access to capital because banks didn’t finance them. Georgia is historically an agricultural country thus capital should be provided to all farmers and leasing will be a very good tool to make it happen,” declared Triana.
“There are several changes to be made in the provisions of the civil code of Georgia. First of all it creates an unfair burden for leasing companies that prevent them from providing the financial role that leasing companies provide everywhere and this translates as liability that the supplier of the goods has on the quality of goods to the lessor which is generally a financial institution,” said Triana.
“The second point is the way the tax code is treating leasing companies. The latter have been mistreated in many articles of the law. Perhaps the most important one is article 107 that provides that leasing companies must pay taxes over revenues that they have not yet received, and are never going to receive because the tax code created fictional ways to collect the revenues. Thus we are trying to match the taxes to the economic reality and not fiction. And today I hope that all government officials are going to understand what the economic reality of a leasing business is and how taxation should be put in line with it,” noted Triana.
“The world’s largest leasing industries (USA, UK, Japan, Europe, Brazil, Mexico…) have developed their leasing industry providing certain tax incentives. Pension funds are the largest providers of finance to leasing.”
“There are different types of leasing companies like Bank Affiliated, Independent and Captive companies: the latter ones are Caterpillar, Dell, IBM etc. In Georgia, Tegeta Motors could be a very good captive company whilst Alliance Group an independent company,” noted Triana.
The Historical Background of Leasing
Historically leasing surged in the 1950s in the United States then it expanded first to Canada and the United Kingdom and lately to Continental Europe (beginning of the 1960s).
In the US there are more than 2-3 thousand leasing companies currently and the field of business of leasing is very developed due to a good legal environment; that market entry and exit is free and many other reasons.
The shape of legal relationships was modelled on the Anglo-Saxon Common law.
Since the adoption of the French leasing law in 1966, further to a disastrous judgment of the Cour de Cessation Francaise, there has been a movement for the unification of Leasing Law worldwide.
At present the International Institute for the Unification of Private Law adopted a Model Law that incorporates the best practices in leasing regulation and conciliates the tendencies of common law systems and civil law systems.
The modern law of leasing – was adopted and improved the general principles contained by the 1988 UNIDROIT Ottawa Convention on International Financial Leasing; it defines leasing as a tri-party transaction where the parties are the supplier, the lessor and lessee; defines the roles of parties and in particular the role of the lessor as a professional investor in capital equipment for the interest and benefit of the lessee; but does neither regulate the tax aspects of the leasing transaction, nor the structure and control of lessors.
“Leasing has been fuelled in most cases by foreign investors but now foreign investors are very reluctant to come to Georgia unless the law changes,” say experts.
As Irakli Kordzakhia, partner of Georgia law firm says, leasing should be taxed the same as it is done with regards to banks, if leasing was taxed higher than banks then people would prefer banks to leasing companies.
“The system of regulation of the leasing law will be adopted according to the Georgian reality and not copied for instance from the US because the business environment is different here and the legislation too,” said Kordzakhia.
“Law systems are different in various countries for instance in the US there is a common law system whilst in Georgia we have civil law; most of the countries are actually based on a civil law system and Georgia is one of them. The Georgian Civil Code is actually based on the German code,” said Kordzakhia.
“Mother Law leasing which has been developed internationally, was the product of combining the best practices of all legal systems, including the common law system, Islamic law, civil law and even what was the former socialist model. Thus all the regulations will be made according to this law,” declared Kordzakhia.