What actually separates a rental from a finance lease?

The customer's right to buy. Under Federal Decree-Law 32/2023 the defining characteristic of a finance lease is the lessee's purchase option — not the length of the contract, not the size of the payment, and not whether you call it a lease in the paperwork.

An operating lease has no such option. The car comes back at the end and its residual value is your risk, which is why an operating lease needs no finance licence however long it runs.

A balloon deal usually does confer one: the large final payment is a price at which the customer may keep the car, and a right to buy at a stated price is a purchase option whatever the contract calls it.

So the test is not commercial, it is contractual. Read the ending clause, not the monthly figure.

Why does a lease payment come out differently from a rental price?

Because a rental prices time and a lease prices an asset over time. A rental asks what a month is worth; a lease derives the payment from four numbers — the vehicle's value, the down payment, the residual value at the end, and the cost of the money in between.

That derivation changes what the contract can answer. A rental schedule cannot tell you what it costs to settle today, because the only figure it holds is what is left to pay. A lease can: the honest settlement figure is the outstanding principal, which is what the asset still owes.

The gap between the two is not small. On a 250,000-dirham vehicle over 36 months at 8% with a 100,000 balloon, the outstanding principal at month 24 is about AED 136,000 while the remaining payments total about AED 45,600. An operator reading the wrong one from a rental-shaped schedule quotes a settlement that is a third of the truth.

What is a residual value, and what happens if you get it wrong?

The residual is what the contract says the car will be worth at the end. It is the single number that decides whether the deal made money.

On an operating lease the customer never pays it and never sees it — but it still sets their monthly payment, because they are only paying for the part of the car they use. Price the residual at zero and you price the deal as though the vehicle were worthless in three years, which produces a payment nobody will accept.

Set it too high and the payment looks wonderful until the car is sold. The difference between the residual you promised and the price it actually fetched is your profit or your loss, and it arrives three years after you priced it.

That is the real risk in operating leases and it is not a software problem. What software owes you is to keep the number visible as exposure rather than quietly counting it as income.

Who pays the Salik, the fines and the servicing on a lease?

Whatever the contract says — but the answer has to be decided before the first invoice, because it changes what the monthly figure means.

A lease that bundles registration, insurance and servicing is charging the customer for costs you will incur, so those costs have to sit against that contract's margin or your reported profit is fiction. A lease that excludes them is a lower headline payment and a different conversation at renewal.

Tolls and traffic fines behave the same way they do on a rental: they are pass-throughs, attributed to whoever held the car when the charge was incurred, and re-billed out of scope of VAT rather than at 5%. A fine arriving three weeks after the customer stopped driving still belongs to the period they were driving.

How is mileage handled differently on a lease?

A lease sells an allowance across the whole term — 60,000 km over 36 months — and reconciles once, rather than per rental.

The interesting part is an early ending. A customer who settles at month 12 of a 36-month lease has had a third of the term and is fairly entitled to a third of the allowance, not the whole 60,000 km they never paid for. Charging the full-term allowance against a year of driving hands back kilometres nobody bought; charging strictly per month can penalise someone who front-loaded a long trip, which is precisely why the allowance is a term figure in the first place.

Pro-rate it, and round in the customer's favour where the division is ambiguous. You wrote the contract; the benefit of your own arithmetic should not be yours.

How does it end, and why does the ending change the tax?

There are three endings and they are not interchangeable, because the difference is tax rather than bookkeeping.

An early settlement discharges an obligation: the customer pays the outstanding principal and the contract closes. A buy-out is a supply of goods — title moves, so VAT applies to the residual at the standard rate. A repossession is explicitly not a supply at all under the FTA's automotive guidance, so it carries no VAT; the tax arises later, if and when you sell that car to somebody else.

Collapsing the three into a single 'closed' status loses the only fact that decides the treatment. If your system records that a lease ended but not how, the VAT position has to be reconstructed from memory.