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PURPOSE OF ECONOMIC  SUBSTANCE IN UAE

8/1/2019
ECONOMIC SUBSTANCE REGULATIONS

IMPLEMENTING ECONOMIC SUBSTANCE IN UAE:

On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019, concerning economic substance regulations in the UAE, requiring all in-scope UAE entities (“Relevant Entities”) that carry on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE from 30 April 2019.

The regulations have been issued in response to European Commission concerns which resulted in the UAE being added to the European Union list of non-cooperative tax jurisdictions

PURPOSE OF ECONOMIC SUBSTANCE IN UAE:

The introduction of the new ES rules is a milestone for the UAE’s tax policy and an important step towards its alignment with the global Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) directives. The main purpose is to demonstrate the actual economic activity in UAE & not solely to benefit from the privileged tax regime.

ECONOMIC SUBSTANCE IN UAE IS APPLICABLE FOR:

The Regulations apply to all UAE onshore and free zone including financial free zones [DIFC and ADGM] companies that carry on a "Relevant Activity". We expect entities incorporated under offshore (free zone) companies regulations that carry on a “Relevant Activity” to be within the scope of the Regulations.

IMPORTANT FACTORS / REQUIREMENTS FOR ECONOMIC SUBSTANCE

  • Company should be directed and managed from the UAE
    • a quorum of board members is present in the UAE & meetings are conducted in UAE
    • branch managers of foreign companies are present in the UAE when taking key management and operational decision
  • Conduct the relevant “core income generating activities” [CIGA] in the UAE
  • Any UAE entity licensed in UAE (mainland and/or free trade zones) & that undertakes “Relevant Activities” as mentioned below:
    • Banking
    • Insurance
    • Investment fund management
    • Lease finance
    • Headquarters
    • Shipping
    • Holding company
    • Intellectual property
    • Distribution and service centers
  • Adequate number of qualified employees, office space and annual expenditures in the UAE.
  • A Relevant Entity that only undertakes a Holding Company Business will be subject to less stringent economic substance requirements.
  • Additional requirements apply if a Relevant Entity carries out “high risk IP related activities”
  • If a Relevant Entity carries out more than one Relevant Activity, the economic substance requirements must be met for each of the Relevant Activities.
  • The regulations apply from the date of issuance of the Resolution – 30th April 2019. Existing entities will have to comply from 20 April 2019 onwards, with the first return due in 2020. New entities must comply with the Regulations upon receipt of their trade licenses, with the first return due in 2020 (or later)
  • Annual administrative penalties of AED 10,000 to AED 300,000 apply if an entity does not meet the requirements or if inaccurate/no information is provided to the regulatory authority. The penalties shall increase where there are failings in consecutive years and ultimately regulatory authorities may suspend, revoke or deny renewal of an entity’s license.
  • Entities that are directly or indirectly owned by the UAE government (both federal and local) are specifically excluded from the Regulations.
  • Each Relevant Entity must report specified information on its ‘Relevant Activities’ annually to the authority which has issued its trade license. (this includes, for example, information on the relevant activities such as nature and amount of revenue, expenses, place of business and number of employees with qualifications).
  • Prepare and submit a compliance report to the regulatory authority which includes below
    • Type of CIGA conducted
    • Amount and type of income arising from the CIGA
    • Amount and type of operating expenses and assets to conduct the CIGA
    • Location of place of business and, if applicable, plant, property or equipment
    • Number of full-time employees with qualifications and staff responsible for carrying out the CIGA
    • A declaration of compliance with the Economic Substance test - The Competent Authority shall issue guidance on how the Economic Substance Test may be met.