Non-Fulfilment of Economic Substance Tests

Non-fulfilment of Economic Substance tests – Impact on Parent Company

More often than not, business overlook the broader challenges and the tax implications that may result due to failure in meeting the requirements of the Economic Substance (“ES”) Tests covered under the UAE ES Regulations.

We have provided below an overview of the potential tax challenges that may trigger for the parent company of a subsidiary incorporated in the UAE for failing to meet the ES Tests.

Three ES tests to be met:

In order for a Licensee to demonstrate that it has adequate substance in the UAE in a given Financial Year, it must meet the following:

1. Core income generating activities (“CIGA”) to be conducted in the UAE.
2. Must be directed and managed in the UAE.
3. Have adequate employees, expenses, and assets.

Impact on parent company if ES Tests are failed to be met

1. Disregard of separate entity concept and inclusion of UAE entity income with that of parent company.
2. Income of the UAE entity subject to taxes in the hands of parent company where it is a tax resident.
3. Risk of Permanent establishment in the UAE.
4. Double taxation issues if income taxed in both the jurisdictions based on source and residency rules.
5. Penalty and litigation exposure.
6. Uncertainty in tax costs and tax positions.
7. Accounting and financial reporting impact.
8. Impact on Group tax cost and the business model.

How can Crowe help?

• Identify gaps between existing substance and the level of substance required under ESR and advise on remedial measures to ensure fulfillment of ES Test in future.

• Advising on the documentation to be maintained to support any future inquiries from the authorities.

• Revisit company practices that has impact on the ES test requirements.