The small to medium enterprises sector (SME) plays a critical role in achieving a country’s developmental goals. In Dubai, for instance, small and medium-sized enterprises make up 95% of all businesses officially registered in the Emirate. To support and help local businesses thrive, the UAE government has been actively seeking ways to strengthen this sector over the last few years.
One of their solutions was the issuance of the UAE Federal Law on Financial Leasing. In this article, we discuss the purpose of the Law and demonstrate how it works in practice.
What is Leasing?
Leasing is an agreement between two parties, according to which one party (the lessor) provides an asset for usage to another party (the lessee) for a particular period, in return for a single payment or a series of payments.
Assets can be personal, such as real estate or vehicles, or business-related, including valuable industrial and production equipment like machinery, vehicles, vessels, aircraft, and more. Depending on the agreement, there might be the right or option to take ownership of the leased equipment at the end of the leasing period. Some common cases include rent to own car Dubai and lease-to-own homes.
What is the Financial Leasing Law?
Leasing has become an important financial technique for SMEs today because it aims to give businesses more opportunities to reach their growth potential and sustainability.
Before 2019, leasing activities didn’t have a defined regulated framework and relied on the general principles of the UAE law. The introduction of the UAE Federal Law No.8 of 2018 on Finance Lease has provided a legislative basis for leasing activities, thus bringing more clarity and structure to them.
The “New Law”
In September 2023, the UAE government declared the enactment of Federal Decree-Law No. 32 of 2023 on Finance Lease (also known as “New Law”). It came into effect in March 2024 and replaced the existing Federal Law No. 8 of 2018 on Finance Lease (now known as “Current Law”).
What Are the Key Aspects of The Law?
License from the UAE Central Bank
All companies offering “Finance Lease” services must obtain a license from the UAE Central Bank. It’s important to understand that finance lease agreements made with a company that doesn’t have a license are considered invalid.
Types of Contracts
There are two types of leasing contracts:
Supply Contracts. In this type of agreement, a leasing company (the lessor) buys a product, like equipment or property, from a supplier (the manufacturer) specifically to lease it to a customer (the lessee).
Finance Lease Contracts. This is where the leasing company rents out a product or property to a customer for a fixed period in return for regular payments. The customer often has the option to buy the product at the end of the lease.
The “Leased Property” in these agreements can include movable items (like vehicles or equipment) and real estate (including properties under construction).
Registering Finance Lease Contracts
The key aspects of registering a lease contract include the following:
All finance lease agreements must be officially recorded in a register
The lessor is responsible for registering these agreements, not the lessee
Once registered, these agreements are legally recognised and can be used as proof in case of disputes with third parties
Allocation of Risk
According to the New Law, the parties of a finance lease agreement share risks in the following way:
Two-Party Finance Lease. The lessor is accountable for any loss unless the loss is caused by the lessee. In that case, the lessee is held responsible.
Three-Party Finance Lease. Once the contract is signed, the lessee bears the risk of loss or damage to the leased asset. However, if the asset doesn’t match the contract terms or hasn’t been delivered in the first place, the lessee can claim compensation. In such cases, the responsibility for the loss would fall on the lessor or the supplier.
The lessor and lessee are allowed to agree on their own rules for sharing risks.
Practical Cases of Leasing
Let’s take the example of vehicle leasing to illustrate how the Law works in practice.
Understanding car lease in Dubai
If you are a tourist staying in Dubai for a short time, you will most likely want to get a rental car to move around the city with comfort. If you are going to stay for longer and need a vehicle for business and personal reasons, you may consider leasing.
Renting a car for a long period of 2-5 years is known as leasing. Unlike the rented car, leases allow you to use the vehicle as if it were your own. At the end of the lease term, you can either renew your lease contract, buy the vehicle, or return it to the company.
Lease-to-own cars in Dubai
As living costs in Dubai continue to rise, a lease-to-own car has become a practical and
affordable option for people to meet their transportation needs. The gradual payment approach allows many people to enjoy driving a comfortable, high-quality vehicle without causing them much financial stress.
Key points when choosing a car lease
It’s pretty easy to find a car rental service in Dubai, however, each of them offers different leasing conditions and contract terms. This is what you should pay attention to:
Understand the lease terms and what happens at the end of the leasing period
Check the mileage restrictions to avoid penalties
Familiarise yourself with the wear and tear policies to know what is accepted and what leads to extra charges
Why you should choose a reputable car leasing company
Cooperating with a reliable car rental service can not only ensure your peace of mind but also bring financial benefits, including:
Comprehensive maintenance packages to keep your car in top condition without additional costs
Roadside assistance 24/7, adding an extra layer of security and comfort during the lease term
Customizable plans that tailor your lease terms to your personal or business needs
Financial implications to consider
Monthly Payments. They are typically lower than loan payments because you’re only paying for the car’s loss in value (depreciation), not its entire price.
Down Payments. Some leases require up-front payments, however, these can be negotiated.
Insurance and registration. In the UAE, the lessee is typically responsible for insuring the vehicle. Very often, companies require the lessee to obtain comprehensive and collision coverage, especially if it is a luxury car rental.
