Definition of a finance lease under Vietnamese law
Vietnamese banking regulations do not provide for a clear definition of a financial lease (cho thuê tài chính). The lack of a clear definition may result in unnecessary legal risks for parties to a cross-border lease transaction (e.g., an aircraft lease). For example, if a cross-border lease is regarded as a financial lease, then the lease may need to be registered with the State Bank of Vietnam as a foreign loan.
Under the Law on Credit Institution 2010, the act of finance leasing is defined to be (1) the extension of medium and long-term credit; (2) on the basis of a finance leasing contract; and(3) satisfying one of the following conditions:
upon expiry of the lease under the contract, the lessee may take over ownership of leased assets or may continue to lease them under the agreement of the parties; or
upon expiry of the lease under the contract, the lessee shall have the priority right to purchase the leased assets at a nominal value less than the actual value of the leased assets as at the date of purchase; or
the minimum term of the lease of any single asset must equal at least 60% of the period necessary for depreciation of such leased asset; or
the total rent for any single asset stipulated in the finance lease contract must be equal at least to the value of such asset at the signing date of the contract.
Decree 39/2014 defines finance leasing to be “an activity of medium-term or long-term extension of credit on the basis of a finance leasing contract between the finance lessor and the finance lessee. The finance lessor undertakes to purchase an asset for finance leasing at the request of the finance lessee and holds the ownership of the asset under finance leasing throughout the lease duration. The finance lessee uses the asset under finance leasing throughout the lease duration prescribed in the finance leasing contract.”
Decree 39/2014 also defines a finance leasing contract to be “a non-cancellable contract entered into between the lessor and the lessee on the finance leasing of one or more leased assets.”
The definitions of a financial lease under these regulations are circular in the sense that the term “finance leasing contract” is used to define “finance lease” and vice versa. This results in certain confusion such as:
· if a contract satisfies the condition (i) and (iii) above but is not called “financial lease contract”, then it is not clear whether such contract is a financial lease. Since literally speaking, such contract is not called financial lease contract; it is arguable that such contract is not a financial lease contract. However, it is not usual for the parties to circumvent a legal definition just by changing the name of the relevant contract; or
· if a contract satisfies the condition (i) and (iii) above but is “cancellable” (e.g., by giving advance notice and paying certain pre-payment termination), then it is not clear whether such contract is a financial lease. Again this has a literal support from the definition of financial lease contract under Decree 39/2014 but is not logical.
Perhaps, the reasonable interpretation is that a lease would be a financial lease under banking regulations if (A) the lease satisfies condition (i) and (iii) above and (B) the lease is classified as a financial lease under the Vietnamese Accounting Standards (VAS). This means that (B) is used instead of condition (ii) above. This is because VAS has a more coherent approach to identify a finance lease (or a financial lease contract). Under VAS no. 6, a finance lease is defined as “an asset lease in which the lessor transfers most of the risks and rewards attached to the ownership of the asset to the lessee. The ownership of the asset may be transferred at the end of the lease term”. Section 9 of the VAS no. 6 provides cases that normally lead to financial leases, including:
The lessor transfers the asset’s ownership to the lessee at the end of the lease term;
At the inception of the lease, the lessee has the right to purchase the leased asset at a price expected to be lower than the reasonable price at the end of the lease term;
The lease term accounts for most of the economic life of the asset even if the ownership is not transferred;
At the inception of the lease, the present value of the minimum lease payment accounts for most of the reasonable value of the leased asset; and
The leased asset is of a special-use type which can be used only by the lessee without major modification or overhaul.
Section 10 of the VAS no. 6 lists out cases where a lease contact would be considered a financial lease:
If the lessee cancels the contract and pays compensation for damage associated with the contract cancellation to the lessor;
Incomes or losses from the change in the reasonable value of the residual value of the leased asset are associated with the lessee; or
The lessee can continue leasing the asset after the lease contract expires at a rent lower than market rents.
This post is contributed in parts by Le Thanh Nhat, a trainee at Venture North Law.