I. Introduction
This Final Part of the series of legal briefs which highlight the legal framework of Ethiopia vis-à-vis capital goods leasing business and its salient features, and it will deal with the remedies for default in repayment of rent and the lessee’s failure to return the goods, termination of lease agreements, investment incentives and other fiscal issues. Finally, it outlines some possible problems and their possible solutions.
II. Remedies for Default in Rent Payment and Repossession
1. In all the three types of the lease agreements, the lessee is obliged to pay the rent amount agreed on the due date and in the manner agreed. The lessee is also obliged to observe other obligations stated in the law and the lease agreement. Where the lessee defaults in the payment of the rent or commits other types of faults, which may breach the agreement, the lessor is expected to grant him a period of 30 (thirty) days for remedying the default so far as the default may be remedied (Articles 7(1) cum 7(3) of the Leasing Proclamation).
2. Where the lessee failed to remedy the default within 30 (thirty) days, the lessor may rescind the agreement, repossess the leased capital goods and claim damages. In case of defaults in payment of the rent, the lessor may recover the accrued unpaid rent together with interest and damages, whether the default is remedied or not (Articles 7(2) cum 7(3) of the Leasing Proclamation).
3. The lessor can request repossession of the leased goods immediately and claim damages, where the lessee rescinded the agreement and fails to deliver the goods as per the due notice given to him by the lessor. The lessor can also request repossession of the leased goods upon the expiry of the agreement, in case of financial and operating leasing agreements, and to claim related damages (Article 9(1) cum 9(3) of the Leasing Proclamation).
4. Where the lessee is not willing to return the leased capital goods to the lessor, MoTI is obliged “to take appropriate measures in order to ensure the return of the leased capital good to the lessor, where the lessee has the obligation to return the leased capital good to the lessor but fails to return it, and may order the police to facilitate the execution” (Article 18(3) of the Leasing Proclamation).
III. Termination of the Lease Agreement
5. The lease agreements concluded between the lessor and the lessee terminate, principally, upon the expiry of the agreed date. In case of operating lease, if the lessee remains in possession of the capital goods leased and the lessor does not claim its return, the agreement is deemed to have extended until one of the parties request for its termination. Unless it is provided in the lease agreement, the death or the incapacity of the lessee cannot be invoked as a reason for termination of the agreement (Article 12 of the Leasing Proclamation).
IV. Investment Incentives and other Fiscal Issues
6. The lessor and the suppliers of capital goods are exempted from customs duties on capital goods they import in accordance with the Investment laws and the Directives issued by the Investment Board, pursuant to the powers granted to it by the Investment laws (Articles 16(1) and 16 (2) of the Leasing Proclamation). Currently investment is regulated by the Investment Proclamation (Proclamation No.1180/2020), (herein after referred to as the Investment Proclamation) and per the Proclamation Investment Incentives and Investment Areas Reserved for Domestic Investors (Regulations No.270/2012), as amended by Regulations No. 312/2014, (herein after referred to as “Investment Regulations”) is enacted and it is operational.
7. As defined in Article 2(7) of the Investment Regulation, "Customs duty" includes indirect taxes levied on imported goods. The Investment Regulation further provides that an investor might be allowed to import free of any customs duty: capital goods, construction materials, vehicles and spare parts that are necessary to establish and operate a business. The Investment Board is to determine the specific manner and detail of such duty-free importation of capital goods and vehicles (Articles 13 cum 14 of the Investment Regulations).
8. In case of a financial lease or an operating lease, a depreciation allowance for capital goods shall be deductible from the rental income received by the lessor, as the legal owner of the leased capital goods. However, in the case of a hire purchase lease agreement the lessee should benefit from the depreciation allowance (Article 17(1) of the Leasing Proclamation).
9. The rent received by the lessor is treated as an income and it is treated as per the Ethiopian Income Tax Proclamation (Proclamation No. 979/2016) and the Income Tax Regulations (Regulations No. 410/2017). As stated in these laws, the amount of the income tax varies depending on the amount of rent earned by the lessor. Conversely, the rent paid by the lessee it to be treated as an operating expense of the lessee and is deductible from its income for the purpose of taxation (Article 17(2) cum 17(3) of the Leasing Proclamation).
10. The payments made to a lessor under capital goods finance are also exempted from Value Added Tax (VAT) as stated by Article 16(3) of the Leasing Proclamation.
V. Concluding Remarks and Potential Problems
11. As can be understood from the successive legal expositions of the Leasing Proclamation and the other laws, regulations and directives outlined herein above, the capital goods leasing business is well regulated. Capital goods finance is open for investment by foreigners, either by themselves or in collaboration with domestic investors as long as they fulfill the requirements enunciated in these successive legal briefs.
12. The lessor and the lessee are entitled to determine the details of their lease agreement, freely and mutually, based on their specific need and wish. Such agreement is to be registered and enforced by MoTI.
13. MoTI is even empowered to order the police to assist the lessor to reclaim the capital goods which the lessor has leased to the lessee. Furthermore, MoTI and NBE are empowered to issue directives required for the implementation of the Leasing Proclamation. MUDC is empowered to register the ownership right which persons, including lessors, have over construction machinery and equipment.
14. One of the possible problems that a lessor might face is failure of the lessee not to return the leased capital good as per their agreement. In such a case, MoTI is authorized to take appropriate actions, including ordering the police, to ensure that the good is returned to its lawful owner, i.e. the lessor. Due to the possible awareness problem of MoTI and the Police, the effectiveness of this provision of the law might be questionable.
15. With this problem in mind, it is important to train the concerned personnel of NBE, MoTI, MUDC, the Police and other stakeholders to discharge their respective duties. It is also important to urge these government organs to enact further detailed directive that facilities the implementation of the Leasing Proclamation and the Proclamation No. 177/1999 as per the power vested in them by the respective Proclamations.
End of the Legal Brief
Posted on May 15th 2020
| File | Description | File size |
|---|---|---|
 CapitalGoodsleasingbusinessammendement_807_2013.pdf | 2906 kB | |
| Proc No. 103-1998 Capital Goods Leasing Business.pdf | 1251 kB |