The UAE's Federal Decree-Law No. 32 of 2023 on Finance Lease (New Finance Lease Law), effective from 25 September 2023, replaces the 2018 Finance Lease Law. The defining criterion for a finance lease remains the lessee's option to purchase the leased property. Ministerial Decision No. 197 of 2024 (2024 MD), which supersedes the 2020 accounting standards, eliminates previous criteria used to determine finance leases, focusing solely on the purchase option's significance.
As highlighted in our Update in July, His Highness Sheikh Mohammed bin Zayed Al Nahyan, President of the United Arab Emirates, issued the Federal Decree-Law No. (32) of 2023 on Finance Lease (the New Finance Lease Law) on 25 September 2023, which repealed the Federal Law No. (18) on Finance Lease (2018 Finance Lease Law).
The key point that defines a lease as a finance lease for the purposes of the New Finance Lease Law continues to be, as was the case under the 2018 Finance Lease Law, the existence of a purchase option in favour of the Lessee.
Ministerial Decision No. 197 of 2024 On the Regulation of Accounting Treatment Provisions Related to Financial Leasing (the 2024 MD) was published in September this year and replaces Ministerial Resolution No. 76 of 2020 regarding the accounting standards on the Finance Leasing system (the 2020 MR).
An interesting point is that when the 2018 Finance Lease Law and 2020 MR were read together, a number of factors were to be considered in determining whether or not a particular structure constituted a finance lease.
These included:
- The lease transfers ownership of the Leased Property to the lessee by the end of the lease term;
- the lessee has the option to purchase the Leased Property at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised;
- the lease term is for the major part of the economic life of the Leased Property even if title is not transferred at the end of the lease term;
- At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the Leased Property;
- The leased Property is of such a specialised nature that only the lessee can use it without major modifications.
2024 MD no longer refers to these factors- so it appears that when determining whether a structure or transaction constitutes a finance lease, one looks solely at the New Finance Lease Law and the importance of the option to buy/own the asset at the end of the period.
We await further guidance and regulations in this area, including as to the regulatory authority responsible for non-financial institutions that wish to carry out this type of activity and the requirements for obtaining the relevant licensing. It will be interesting to see as well whether the option to purchase is in fact, the only criteria that is relevant when determining whether a structure is a finance lease.
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