On September 25, 2023, the United Arab Emirates (“UAE”) declared the enactment of Federal Decree-Law No. 32 of 2023 on Finance Lease (“New Law”), which shall come into effect on March 29,2024 to replace and abrogate the existing Federal Law No. 8 of 2018 on Finance Lease (“Current Law”). Nonetheless, it is important to note that the implementing regulations passed in connection with the Current Law shall remain valid and in force until the issuance of new implementing regulations aligned and supplemental to the amendments introduced under the New Law.
The New Law incorporates several notable modifications, primarily impacting the following key facets of a finance lease transaction:
Definition of ‘Finance Lease’ and Introduction of Additional Arrangements
In line with the Current Law, the New Law upholds the notion of a finance lease. However, it redefines the notion by eliminating the requirement for the lessor to own the asset and engage in a separate contract with the lessee. Further to this, sub-leasing arrangements, encompassing both sub-lessors and sub-lessees, as well as sale with lease-back arrangements wherein the leased asset is sold to the lessor by the supplier and then leased back to the supplier, are now officially recognised under the New Law.
Scope of Application
It is crucial to acknowledge that the provisions of the New Law are applicable where the asset in consideration or the lessee’s business headquarters is located onshore in the UAE, in free zones where special regulations concerning finance leases do not apply, and where the lease contract specifies that it is to be subject to the laws of the UAE. Moreover, as a departure from the Current law, the New Law expressly states, that the following assets shall be formally exempt from the provisions of the New Law: (i) airplanes, airframes, helicopters, and various types of aircraft or marine vehicles that are subject to registration in special registers in compliance with UAE legislations and international treaties and agreements; (ii) cash money; (iii) investment securities and (iv) lands granted by the government of the UAE.
Regulatory Requirements
The Current Law provides that: (i) any finance lease activity and/or contract that is finalized with an individual not licensed by the UAE Central Bank shall be null and void, and any person not licensed by the UAE Central Bank is “prohibited from using the term finance lease in their business name”. In conformity with the New Law, finance lease activities practiced by banks, companies and institutions shall continue to be regulated and supervised by the UAE Central Bank. In this context, the New Law has resulted in a noteworthy shift compared to the Current Law; this shift provides that the licensing and regulatory framework, along with the regulatory authority of entities striving to participate in finance lease activities who are not licensed by the UAE Central Bank will be independently established by the UAE Cabinet, rather than being subjected to the previously mentioned licensing restrictions.
Registration
Additionally, in relation to the registration requirements and in accordance with Article 6 of the New Law, it can be stated that the obligation imposed by the Current Law to establish a special register for registering finance lease contracts has now been abolished. Indeed, the New Law mandates finance lease contracts to be registered in the register of the specific leased asset in the UAE. However, it is important to highlight that, unlike the Current Law, the registration of a finance lease contract is no longer a precondition for determining its validity. Nonetheless, it should be underscored that the registration of lease contracts remains a significant prerequisite for enforceability vis-à-vis third parties under the New Law.
Types of Finance Leases
Pursuant to the New Law, two forms of finance leases have emerged, featuring: (a) a two-party finance lease, which shall be between a lessor and a Lessee, with a purchase option of the leased asset, and (b) a three-party finance lease, which involves a lessor, a lessee and a supplier, where the lessee has the discretion to choose the supplier and the specifications of the leased asset, and the lessor maintains ownership of the leased asset for purposes of leasing it to the lessee, provided that the supplier is duly informed of such understanding.
Allocation of Risk
Unless otherwise agreed between the lessor and the lessee, the allocation of risk under finance lease arrangements is governed under the New Law in accordance with the following:
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- In a two-party finance lease, the lessor shall be accountable for any loss, and the lessee shall assume liability solely in the event the loss is attributable to the lessee.
- Conversely, in a three-party finance lease, the lessee shall bear the risk of loss of the leased asset from the time the parties execute the lease contract, unless the asset is not delivered to the lessee (or is partially delivered or delivered in a manner inconsistent with the terms of the lease contract) and the lessee claims compensation in accordance with the provisions of the New Law, then the lessor or the supplier shall be responsible for the loss.
In conclusion, the New Law marks a significant development in the financial landscape of the UAE, as it brings about critical changes in how business and individuals engage in financing activities and transactions. Nonetheless, it is anticipated that the yet to be issued implementing regulations for the New Law shall provide an additional layer of clarity, particularly in terms of accounting treatment of finance leases and the licensing and registration of finance lease activities.