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United Arab Emirates Economic Substance Regulations
Published on June 30th, 2019.
April 30 2019, the United Arab Emirates (UAE) Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”). The introduction of the Regulations requires relevant UAE entities that perform certain business activities to be able to demonstrate economic substance in the UAE from April 30 2019.
WHY HAVE THESE REGULATIONS BEEN INTRODUCED?
The launch of the Regulations follows the outcome of the European Union (EU) including the UAE on a list of non-cooperative jurisdictions for tax purposes (EU Blacklist). In addition, the Regulations demonstrates the continuous efforts of the UAE to fulfil all EU requirements and the highest international standards on taxation including the Organisation for Economic Co-operation and Development (OECD) conditions.
WHO WILL NEED TO COMPLY WITH THE ECONOMIC SUBSTANCE REGULATIONS?
The substance requirements will apply to all UAE onshore and free zone companies that generate income conducted by “Relevant Activities” such as:
- Finance and leasing business
- Fund management activity and business
- Banking related business
- Insurance related business
- Holding company business
- Headquarters business
- Intellectual property (IP)
- Distribution and service centre business
- Shipping business
Corporate entities that are owned by the UAE government are excluded from the Regulations. UAE sovereign investment funds and any other UAE government related companies would not need to meet UAE economic substance requirements. Furthermore, a company is not obliged to meet and pass the economic substance test if it does not make income in relation to a relevant activity it carries.
WHAT ARE THE REGULATION REQUIREMENTS?
UAE onshore and free zone entities will need to meet and satisfy they have effective economic substance in the UAE, by passing the test in relation to the relevant business and activities. A company meets the economic test if it:
- Conducts “core income-generating activities” in the UAE
- Is directed and managed in the UAE
- Has an adequate number of full time employees, expenses and physical assets for carrying out the business activity, in the UAE.
WHAT IS THE PROCESS FOR THE REPORTING REQUIREMENTS?
The relevant licensee has an obligation to annually prepare and submit the Economic Substance Report (Report) to the Regulatory Authority (to be determined by the Cabinet of Ministers’ resolution). The Report is to evidence that the licensee/entity satisfies the requirements and include information on the licensee’s relevant activities such as:
- Nature and amount of revenue
- Place of business
- Number of full time employees with qualifications
- Declaration on the satisfaction of economic substance requirements
WHAT HAPPENS IF A COMPANY DOES NOT COMPLY WITH THE REGULATIONS?
It is essential that all relevant entities comply with the Regulations.
- New entities – must comply with the Regulations once they receive the trade license, with the first return due in 2020 (or later)
- Existing entities – must comply with Regulations from 30 April 2019, with the first return due in 2020
Failure to comply may result as:
- Money Penalties – admin penalties will be from AED 10,000 to not exceeding AED 50,000 within the first year, increased to not less than AED 50,000 to not exceeding AED 300,000 in subsequent year. Additional penalties may apply for not providing relevant information, suspending, revoking or not renewing the UAE Relevant Entity’s trade license.
- Foreign Authority Disclosure – should the economic substance report indicate non-compliance with the Regulations, the UAE Ministry of Finance will disclose information of the licensee / entity to the foreign authorities in the country of the parent company and the ultimate beneficial owner of the Licensee is resident.
WHAT IF A COMPANY OUTSOURCES TO THIRD-PARTY SERVICE PROVIDERS?
A company that outsources some of its activity to a third-party service provider must comply with the Regulations. Such third-party service providers must within their own right have sufficient presence in the UAE and be able to demonstrate it has enough supervision of the outsourced activities.
NEXT STEPS & WHAT WE CAN DO TO HELP
It is vital that your UAE business understands the economic substance requirements and the obligation to annually prepare the Report and file it with the Relevant Authority.
Creation Business Consultants are able to help you get a clear understanding of the requirements that could potentially apply to your UAE Company. Creation provides a full range of services including company secretarial services and other outsourced services and packages bespoke for all UAE entities. It is important that you look at key areas of your operation that the Regulations may impact concerning corporate structuring and tax aspects and to ensure to comply to the Regulatory standards. Please feel free to contact our corporate services team on firstname.lastname@example.org or +971 4 878 6240 should you require a quotation for a corporate structure assessment report and assistance.