Legal issues on protecting the interests of the lessor under financial leasing contracts

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Over the last years the number of leasing contracts, the subject of which is the conveyance of cars to individuals and legal entities, have significantly increased. Vladimir Tereshchenko, Partner of the Werner Law Firm notes that along with the extension of the cars leasing practice the issue of  protecting the interests of the lessor becomes urgent.

"In fact, leasing is a long-term rent of the property with subsequent redemption under certain tax benefits," says Vladimir. The legal framework regulating the financial leasing relations the Civil Code of Ukraine (paragraphs 1 and 6 of Sec. 58) and the Law of Ukraine "On Financial Leasing". Under a lease contract one party (lessor) grants the use of property, which belongs to the lessor, the party of the second part (lessee) for not less than 1 year for lease payments stipulated in the contract.

If the lessee breaches the contract (for example, fails to pay at least one lease payment for more than 30 days from the due date (Part 2. Art. 7 of the Law of Ukraine “On Financial Leasing”), then the problem of interests protection and the return of the property becomes topical for the lessor. Lawyers of the Werner Law Firm provide services to resolve such situations. Based on the practice of solving such issues Vladimir Tereshchenko comments on some points of the lessor interests protection.

One of the main instruments of the lessor interests protection is his right of unilateral termination of a lease contract and demanding the return of the object of lease in case of a contract breach by the lessee. However, the essential point marked by Vladimir is that the recession from a contract is accomplished from the moment when the other party (the lessee) gets to learn or must have learnt about it (Part 3.7 of the Law of Ukraine "On Financial Leasing").

During the court hearing of the cases relating to the debt and damages recovery under financial leasing contracts the date of contract termination tends to be the key factor.  The proper defining of this date shows the accurate time when the payments under the leasing contract ceased to be charged, as well as such type of responsibility of a debtor in the field of leasing as a forfeit penalty (part 2. of art. 785 of the Civil Code of Ukraine) that is charged in the amount of double payment for the use of the property during the period of delay in the return of such property (object of lease) to the owner (lessor).

Lawyers of the Werner Law Firm note that in practice many controversial issues happen to appear regarding the termination of the lease contract, i.e. the moment when the lessee gets to learn or might have learnt about the termination of the contract. The standard form of notification of the lessee is a letter from the lessor about the lease contract termination with the demand to return the object of leasing.

The only acceptable form of such a notification is a registered letter with declared value and the list of enclosures sent with an acknowledgement of receipt. However, in practice such a letter often fails to get to the addressee, as he\she has to personally receive it in a post office. The alternative services such as commercial courier delivery also do not ensure that the letter will be delivered to the lessee. So what’s next to be done?

Vladimir recommends the lessor to use the services of a notary and send through him the notice of termination of the contract as well. This, to some extent, will help strengthen the position of the lessor concerning the date of contract termination. However, the letters itself are not the proper evidence of the notification of the lessee about a contract termination. Only a documental delivery confirmation can be such evidence.

Considering that the courts while hearing the cases relating to the leasing contracts have to take into account the appropriate evidence of the sending of the notice on contract termination to lessee and evidence of receiving this notice by lessee, the lessor has to ensure that the maximum documentation of all the letters sent has been done (checks, receipts, lists of enclosures etc.).

Correct Formalization of Relations between Ordering Customer and Executor Acting as Private Entrepreneur

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With the entry into force of the Tax Code of Ukraine (TCU) it has become rather important to regulate properly contractual relations between private entrepreneurs and legal entities. Freelancers are often registered as private entrepreneurs. For a customer ordering services from a private entrepreneur it is important to observe requirements of tax and labor legislation. In the course of a tax inspection a tax inspector will determine the character of legal relations between the ordering customer and the author (the executor). Partner of Werner Law Firm Igor Darmogray explains the importance of executing the legal relations with a private entrepreneur so that the latter would not be regarded as labor legal relations.

Specifically, Art. 177.8. of TCU stipulates that when calculating (paying) a private entrepreneur an income from transactions conducted within the types of economic activities chosen by the private entrepreneur an economic agent calculating (paying) such income will not withhold the tax at source if the private entrepreneur receiving such income provides a copy of the document confirming his/her state registration as an economic agent pursuant to law. This rule does not apply in case of calculating (paying) an income for executing certain works and (or) rendering certain services under a civil legal contract should it be determined that the relations under such a contract are de facto labor legal relations and the parties to the contract may be regarded as an employer and an employee pursuant to Clauses 14.1.195 and 14.1.222 of Art. 14 of TCU.

If a copy of the document from a private entrepreneur confirming the latter’s state registration as an economic agent pursuant to law is not available the amount of the payment shall be charged with the tax at the rate of 15% or 17%.

Pursuant to Art. 14.1.222 of TCU an employer (a legal entity, its branch, division, representative office or a self-employed person using hired labor of natural persons) on the basis of concluded labor agreement shall be responsible for paying employees salaries and for calculating, withholding and paying the personal income tax to the budget and for performing other obligations set forth by laws. Should the relations between a private entrepreneur and an employer (an ordering customer) be regarded as labor relations this will be a ground to charge the additional personal income tax and the single social contribution, which amounts to ca. half of the payment to the private entrepreneur.

Analyzing the current legislation on the issue of legal relations between a private entrepreneur and an ordering customer (an employer) Partner Igor Darmogray notes that in order to avoid a possible recognition of legal relations between a private entrepreneur and other economic agents as labor relations the following recommendations should be observed:

  1. not to specify the working regime in the agreement;
  2. when determining the subject matter of the agreement to specify the types and volume of the works while avoiding the description of labor functions (profession, specialization and qualification);
  3. to pay for the works on the basis of a protocol of executed works (rendered services) singed by both parties;
  4. not to specify that a private entrepreneur is subject to the provisions of the rules of internal labor order;
  5. not to specify vacations, day-offs etc. in the agreement.

It should also be noted that subject to the proper contractual and documentary formalization of relations between a payer of the corporate income tax and a private entrepreneur applying the simplified system of taxation, starting from 01 January 2012 it is possible to consider the costs of acquiring works/services from a private entrepreneur, when determining the tax base for the corporate income tax.

In addition to that, starting from July 2010 a private entrepreneur applying the simplified system of taxation pays to the Pension Fund of Ukraine contributions whose minimum amount equals 33.2 % of the legislatively determined minimum wage.

Thus, when cooperating with private entrepreneur in Ukraine, customers ordering objects of the intellectual property rights should pay attention to the correct formalization and determining of the character of legal relations with executors to avoid the necessity of paying tax arrears and penalties due to their own carelessness.

On Division of Author’s Rights between Employer (Ordering Customer) and Programmers

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The IT sphere, including software development, belongs to leading branches of economy in Ukraine today. Ukraine is one of the top 5-10 countries in the world regarding the number of certified IT-specialists and the volume of exported computer programs.

How should ordering customers and employers formalize their legal relations with programmers to avoid misunderstandings and disputes regarding the author’s rights? Werner Law Firm helps their clients regulate the issues in the sphere of intellectual property law. Attorney-in-Law Igor Darmogray shares his experience and proposes to analyze some important aspects of the legislation of Ukraine on the author’s rights.

According to Igor Darmogray there is an obvious contradiction between the provisions f Art. 429 of the Civil Code of Ukraine and Art. 16 of the Law on the Author’s Rights on the issue of division of the property rights between an employee and an employer in case this issue is not regulated in a labor agreement.

Economic intellectual property rights to an object created at the commission or in connection with fulfillment of a labor agreement belong jointly to an employee who created this object and an ordering customer or a legal entity (physical person) where the author works unless otherwise stipulated in an agreement (Art. 429 ‘Intellectual Property Rights to an Object Created in Connection with Fulfillment of a Labor Agreement’ and Art. 430 ‘Intellectual Property Rights to an Object Created at the Commission’ of the Civil Code of Ukraine). The assignment of the author’s economic rights is executed in form of an author’s agreement where the list of economic rights is indicated.

Pursuant to Art. 16 ‘Author’s Rights to Works for Hire’ of the Law of Ukraine ‘On Author’s Right and Related Rights’ the exclusive economic right to works for hire belongs to an employer unless otherwise stipulated in a labor agreement (contract) and (or) a civil legal agreement between the author and the employer. An essential provision of a labor agreement and (or) a civil legal agreement is the amount and the procedure of payment of the author’s remuneration, which the author is to receive for creation and transfer of economic rights to a work.

The current practice of applying the abovementioned articles shows that courts in Ukraine give preference to the respective provisions of Art. 429 and Art. 430 of the Civil Code of Ukraine.

As of today most labor agreements in Ukraine are concluded orally by way of submitting by an employee an application for a job and issue by an employer of a respective order on hiring an employee. But concluding an oral labor agreement in the above described manner will not protect the employer from possible misunderstandings regarding the author’s rights to works for hire.

Therefore, to avoid possible disputes between employees and employers (or between an ordering customer and an executor) regarding the division and ownership of economic rights to intellectual property objects created by employees in the course of fulfilling office duties (works for hire) lawyers of Werner Law Firm recommend to conclude with such employees written labor agreements. Igor Darmogray recommends to include into a labor agreement a provision on conditions of paying an employee the remuneration for creating a work for hire (or a provision that such a remuneration is included in the amount of the salary) and a provision on assignment to the employer of economic intellectual property rights to an object created in connection with fulfillment of a labor agreement.