Introduction:

The financial leasing scene in the United Arab Emirates (UAE) is on the verge of a major change with the upcoming enforcement of Federal Decree-Law No. (32) Of 2023 on Finance Lease, set for March 29, 2024. This new law replaces the existing Federal Law No. (8) Of 2018 on Finance Lease, bringing significant changes to the world of financial leasing.

The new Finance Lease Law signals a departure from its predecessor, the 2018 Finance Lease Law, which stays in effect until the new law takes over.

Key Features of the New Finance Lease Law

i. Ownership of Asset: The New Law defines a Finance Lease as an arrangement where the lessor leases an asset to the lessee for a specific term, with the potential for the lessee to acquire ownership. Notably, the New Law removes the requirement for the lessor to own the asset and engage in a separate contract with the lessee.

ii. Scope of Application: The New Finance Lease Law applies when either the asset or the lessee’s business headquarters is located “onshore” in the UAE or free zones without specific regulations on finance leases. Exclusions include aircraft, helicopters, engines, marine vessels, cash, investment bonds, and government-granted land. The New Law acknowledges sub-lease arrangements and explores the implications for financiers in offshore assets, aligning with global best practices.

iii. Bilateral and Tripartite Finance Leases: The New Law introduces two categories: bilateral finance leases, involving an agreement between a lessor and a lessee with a purchase option for the leased asset, and tripartite finance leases, engaging a lessor, lessee, and supplier. This aligns with the common practice of sale and (finance) leaseback in the asset finance industry, including sale-leaseback arrangements.

iv. Licensing Requirements: The New Finance Lease Law retains the need for a license to conduct finance lease activities and penalties for non-compliance. It proposes a dual regulatory approach, with the UAE Central Bank (UAECB) regulating finance lease activities by “banks, companies, and institutions governed by” the UAECB. For other entities, the UAE Federal Cabinet will determine the relevant authority. The Minister of Finance will issue regulations regarding the accounting treatment of finance leases.

v. Registration: Unlike the 2018 Law, the New Law eliminates the need for a dedicated register for finance lease contracts. Instead, finance lease contracts must be registered in the specific register for the leased asset within the UAE, which is crucial for enforceability with third parties.

vi. Enforcement: The New Finance Lease Law reaffirms the treatment of leases and related rights under Federal Law No. (4) Of 2020 on Guaranteeing Rights Related to Movables (the Movables Law). In a tripartite lease, the risk of loss transfers to the lessee unless the asset remains undelivered. In a bilateral lease arrangement, the responsibility for loss falls upon the lessor.

vii. Allocation of Risk: In a tripartite lease, the risk of loss concerning the leased asset is transferred to the lessee unless the asset remains undelivered. In a bilateral lease arrangement, the onus of liability for loss falls upon the lessor, with this liability unable to be shifted to the lessee unless directly attributable to the lessee.

viii. Conclusion: Introducing the New Finance Lease Law in the UAE signifies a significant change in the nation’s financial landscape, redefining finance lease concepts with a more flexible and transparent regulatory framework. Understanding its provisions is crucial to capitalize on opportunities as businesses and investors prepare for its enforcement. The law is poised to attract foreign investment, empower SMEs, diversify financial products, and enhance consumer protection, contributing to the UAE’s sustained economic prosperity and global competitiveness.

Anticipated regulations related to the New Finance Lease Law are expected to offer further clarity, especially in licensing, regulation of finance lease activities, and accounting treatment. The bifurcated regulatory approach adds an intriguing dimension to the evolving landscape.

Embark on a specialized journey with Economic Law Partners LLC, your premier destination for expert guidance on UAE’s New Finance Leasing and its application. As leaders in corporate commercial matters, our dedicated team specializes in navigating the nuances of the evolving finance leasing landscape in the United Arab Emirates.

At Economic Law Partners LLC, we offer tailored legal advisory services, ensuring a seamless alignment of your business with UAE’s New Finance Leasing regulations. Our expertise spans comprehensive compliance checks, meticulous contractual drafting, risk mitigation, and regular updates to keep you informed. Trust us to empower your business with legal strategies that foster growth, compliance, and sustained success in the dynamic world of finance leasing.