18 November 2021
The Lao government has issued the Decree on Lease Business, No. 471/GOV dated 2 July 2021 (“the Decree”), which came into force on 15 August 2021. The Decree replaces the Decree on Leasing No. 11/PM dated 18 February 1999.
The Decree sets out the regulatory framework and procedure for businesses engaged in leasing of movable property, the requirements for lease agreements, and the management of such lease activities. It applies to domestic and foreign individuals, legal entities or organisations that engage in leasing business in Laos.
The following activities are considered as lease business operations:
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Financial Lease, wherein there is medium or long-term lease of property for use in production or business operations of the lessee. The lessee shall be responsible for property maintenance cost throughout the lease period and has the right to use and occupy the property only. When the lease agreement expires, the lessee shall return the leased property or has the option to either buy the property or continue the lease, as agreed between parties.
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Operational Lease, wherein the lessor grants its property to the lessee to use for the duration agreed by both parties. The title of the property belongs to the lessor and the lessor shall be responsible for property maintenance costs throughout the lease period. When the lease agreement expires, the lessee shall return the leased property or continue the lease, as agreed between parties.
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Hire Purchase, wherein the lessor grants its property to the lessee and the lessee will gain title to the leased property when the amount of rent has been fully paid, as defined in the agreement between the parties.
Requirements for a lease agreement
The lease agreement shall be made in written form and contain the following fundamental information:
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the description of the leased property such as type, model, number and other important details;
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value of the leased property, the amount of rent, methods of rental calculation and payment;
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duration of the lease agreement;
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conditions of the lease agreement in the event of loss or damage;
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insurance (if any);
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measures for breach of lease agreement and fines (if any);
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dispute resolution;
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conditions for termination or cancellation of the agreement; and
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other necessary details agreed upon between the parties.
Apart from these requirements, a financial lease agreement shall stipulate the interest rates, and the option whether to purchase the leased property or continue the lease.
A hire purchase agreement also requires interest rates to be stipulated. Agreements with a value of more than LAK 100 million must be submitted to the Notary Office.
The Decree further states that within the agreement period, the lessee can request to purchase the leased property at any time before the expiration of the agreement, depending on the terms of the agreement. The calculation of leased property price shall depend on the actual remaining value.
Lease business application procedure
Individuals and legal entities intending to operate a lease business shall register the enterprise and apply for a lease business operation licence at the Bank of Lao PDR (“BoL”). The lease business must be established in the form of a company with at least two shareholders and with a minimum registered capital of LAK 5 billion.
The BoL will review the application for lease business operation licence and grant the licence if the following conditions are satisfied:
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the registered capital or invested capital is fully paid;
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completed economic feasibility study that is reasonable and implementable;
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a qualified director with experience in finance, banking or other relevant fields;
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shareholders have not been convicted of an intentional criminal offence;
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sufficient number of employees for the business operation;
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appropriate technical equipment and site for business operation; and
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appropriate operation system, inspection system, and internal management.
Conclusion
The Decree provides clarity in the conduct and management of a financial leasing business in Laos. It offers flexibility and benefits for both the lessor and the lessee. The lessor manages risk by retaining ownership over the leased property allows more options for collection in case the lessee fails to perform obligations under the lease agreement. The lessee, on the other hand, is afforded a great option to use equipment and machinery for its business without needing to invest huge capital upfront. The lessee also has the option to own the property at the end of the lease period or return the property to the lessor, depending on the demands of his business or possible changes in technology.
The lease options under the Decree and BoL supervision over lease businesses provide an equitable avenue for entrepreneurs, particularly small and medium enterprises, to grow their business and will hopefully stimulate economic activity in the country.
For more information, please contact:
Aristotle David, Managing Partner, ZICO Law Laos
aristotle.david@zicolaw.com
