Financing lease is a contract with a legal official name, a financial category transaction, and a financial category industry.
Compared with Hong Kong, Macao and Taiwan of China, China mainland 's legal system has its own characteristics. It is neither common law nor quite civil law, and still bears traces of the socialist laws of the former Soviet Union.
China mainland is a separate jurisdiction where all laws are made by the Central People's Government Located in Beijing, it mainly includes the National People's Congress and its Standing Committee, the State Council and its National Financial Regulatory Administration, and the Supreme People's Court.
With the entry into force of the Civil Code of the PRC and the continuous introduction of new regulations by the National Financial Regulatory Administration (NFRA), the legal system of financing lease in China has undergone significant changes. This article briefly introduces the latest financing lease legal system of China mainland.
Ⅰ. Sources of financing lease law
- Civil Code of the People's Republic of China
On May 28, 2020, the National People's Congress of the People's Republic of China officially adopted the Civil Code of the People's Republic of China. The Civil Code of the PRC is the most legal level on financing lease transactions. - Interpretation of the Supreme People's Court on the Application of Law in the Trial of Financing Lease Contract Disputes
The judicial interpretation was adopted by the 1597th meeting of the Judicial Committee of the Supreme People's Court on November 25, 2013, and came into force on March 1, 2014. Later, due to the invalidation of the Contract Law of the PRC, the Civil Code of the PRC came into force and was amended on December 23, 2020.
3. Judicial Case
China mainland does not apply case law. The Central People's Government has also consistently denied that judicial cases are a formal source of law. However, in judicial practice, judicial cases have a decisive impact on judge's decision cases. As a sign of China's online judgment documents, China has actually entered the era of case law. Judges not only research and imitate the decisions of higher courts, but also the decisions of courts at the same levels, at lower levels, and in different places.
Ⅱ. Legal definition of financing lease
The Contracts for Financing Lease is an independent and well-known contract type in the Civil Code. It is not included in the Lease Contracts, it is not a special status of the Lease Contracts. It is independent of the Sales Contracts, Lease Contracts and Loan Contracts. The law requires that the contract for financing lease shall be made in writing.
Article 735 of the Civil Code of the PRC states, “A contract for financing lease is a contract under which a lessee selects a leased object and its seller, and a lessor purchases the leased object from the selected seller and provides it to the lessee for use, who pays the rent in return.”
According to this definition, a financing lease transaction must contain three parties and two transactions. Three parties are the lessor, the lessee and the seller. Two transactions, including a purchase transaction and a lease transaction. This transaction structure is called “direct lease” in China mainland's financing lease industry.
Where the lessee and the seller may be the same party, this situation is called “sale-leaseback”. There is no difference between direct lease and sale-leaseback in law, and sale-leaseback also belongs to the category of financing lease, but it is a different category in tax law. Direct lease shall be regarded as leasing transactions and Value-Added Tax shall be levied; Sale-leaseback are treated as loan transactions and subject to Value-Added Tax.
Ⅲ. The principal rights of every parties - The lessor
Where a lessor concludes a sales contract based on the lessee’s selection of the seller and the leased object, the lessor may not, without the consent of the lessee, modify the content of the contract related to the lessee.
A lessee shall properly keep and use the leased object. A lessee shall perform the obligation for the maintenance and repair of the leased object during the period the leased object is under his possession.
Where the leased object is destructed, damaged, or lost during the period it is under the possession of the lessee, the lessor has the right to request the lessee to continue to pay the rent, unless otherwise provided by law or agreed by the parties.
A lessee shall pay the rent in accordance with the agreement. Where a lessee fails to pay the rent within a reasonable period of time after being demanded, the lessor may request full payment of the rent, or rescind the contract and take back the leased object.
Where a lessee transfers, mortgages, pledges, invests and contributes as share, or otherwise disposes of the leased object without the lessor’s consent, the lessor may rescind the contract for financing lease. - The lessee
A lessee’s exercise of the right to claim against the seller does not affect his performance of the obligation to pay the rent. However, where a lessee has relied upon the lessor’s expertise in selecting the leased object or the lessor has intervened with the selection of the leased object, the lessee may request reduction or exemption of the rent accordingly.
Where a lessor concludes a sales contract based on the lessee’s selection of the seller and the leased object, the lessor may not, without the consent of the lessee, modify the content of the contract related to the lessee.
A lessor shall guarantee the lessee’s possession and use of the leased object.
A lessee has the right to request the lessor to bear the liability for compensation where the lessor falls under any of the following circumstances:
(1) the lessor takes back the leased object without just cause;
(2) the lessor obstructs or interferes with the lessee’s possession and use of the leased object without just cause;
(3) a third person claims a right over the leased object due to a reason attributable to the lessor; or
(4) the lessor otherwise improperly affects the lessee’s possession and use of the leased object.
Where the parties agree that the lessee is only required to pay the lessor a symbolic price upon expiration of the term of the lease, the ownership of the leased object is deemed as belonging to the lessee after the lessee has fulfilled his obligation to pay the rent in accordance with the agreement. - The seller
Where a lessor concludes a sales contract based on a lessee’s selection of the seller and the leased object, the seller shall deliver the subject matter to the lessee as agreed by the parties, and the lessee shall enjoy the rights of a buyer with regard to the subject matter received.
Ⅳ. The lease item
The Civil Code does not make any direct restrictive provisions on the scope of leasehold, but the Civil Code is full of indirect restrictive provisions on the scope of leasehold.
The NFRA has direct restrictions on the scope of the lease. Article 7 of the Interim Measures for Supervision and Administration of Financing Lease Company of the NFRA states, “Leases applicable to financing lease transactions are fixed assets, unless otherwise specified. The financing lease company should carry out the financing lease business with the lease object with clear ownership, real existence and generating income as the carrier. A financing lease company shall not accept as a lease object that has been mortgaged the property, whose ownership is disputed, the property that has been sealed up or seized by the judicial organ, or the property with defective ownership.”
At present, the scope of leased property includes real property, movable property and intellectual property. Among them, real estate only includes buildings, not land, because land ownership is not free to transaction. Intellectual property only includes typical intellectual property rights, such as patents, trademarks, and Copyrights. Atypical intellectual property rights, due to the complexity of rights registration system, market transactions are not active.
Special attention: If the lease item is not real, it will cause the overall financing lease transaction to be invalid. Article 737 of the Civil Code states, “A contract for financing lease concluded by the parties under which a fictitious thing is to be leased is void.” It can also lead to administrative penalties from the NFRA and even criminal liability.
Ⅴ. Types of financing lease enterprises
Lessors are usually financing lease enterprises in China mainland. These financing lease enterprises are must all approved or recorded by the financial supervision and regulation agencies, so obtain the operation qualification of financing lease business. - Financing Lease Company
A financing lease company refers to a limited liability company or a joint stock limited company (excluding a financial lease company) engaged in financing lease business. In most cases, the financing lease enterprises mentioned by us refer to such financing lease companies. It was established in accordance with Interim Measures for Supervision and Administration of Financing Lease Companies. - Financial Lease Company
Financial Lease company refers to a non-bank financial institution that is approved by the NFRA and mainly engages in financing lease business. It was established in accordance with Measures for the Administration of Financial lease companies.
The name of a financial lease company shall contain the words “financial lease.” Without the approval of the NFRA or former China Banking Regulatory Commission, no entity or individual may use such words as “financial lease” in the name of an institution. - Auto Finance Company
Auto Finance Company refers to a non-banking financial institution that is established with the approval of the National Financial Regulatory Administration (NAFR) and exclusively provides auto financing services. It was established in accordance with Administrative Measures for Auto Finance Companies(2023).
The name of an auto finance company shall contain the words “auto finance.” Without the approval of the NAFR, no entity or individual may use such words as “auto finance,” “auto credit,” or “auto loan” in the name of an institution.
Auto financial company carry out financing lease business, and the lease object are limited to automobiles. - Finance Company of Enterprise Groups
Finance Companies of Enterprise Groups refers to a non-banking financial institution that provides financial services for the member entities of an enterprise group by relying on and serving the enterprise group for the purposes of strengthening the centralized management of funds of the enterprise group and enhancing the efficiency of the enterprise group's use of funds. It was established in accordance with Measures for the Administration of Finance Companies of Enterprise Groups.
Finance Companies of Enterprise Groups carry out financing lease business, and the lessee are limited to the member entities of an enterprise group. - Trust Company
Trust company refers to the financial institutions which are established in accordance with the Company Law of the People's Republic of China and these Measures and mainly operate the trust business. It was established in accordance with Measures for the Administration of Trust Company.
Trust company carry out financing lease business, and authorization must be obtained from the principal.
Foreign investment in the establishment of financing lease enterprises is easier to obtain approval or recorded than domestic investment in the establishment of financing lease enterprises, especially the first type of financing lease companies.
Ⅵ. National Financial Regulatory Administration（NFRA） of the State Council
National Financial Regulatory Administration is Supervision and administration of financing lease industry.The NFRA consists of Anti-Illegal Financial Activities Bureau, Non-bank Institution Supervision Department, Asset and Wealth Management Institution Supervision Department and other agencies.
Anti-Illegal Financial Activities Bureau is responsible for supervising and managing Financing lease companies.
Non-bank Institution Supervision Department is responsible for supervising and managing Financial lease companies, Auto Finance Companies and Finance Companies of Enterprise Groups.
Asset and Wealth Management Institution Supervision Department is responsible for supervising and managing Trust Companies.