Economic Substance Regulations – UAE

The Council of the EU adopted a resolution on a Code of Conduct for business taxation, the aim of which was counteracting the effects of No tax or Nominal tax (“NTNT”) regimes around the world.

In 2017 the Code of Conduct Group (Code Group) investigated the tax policies of both EU member states and other countries, assessing:
Tax transparency;
Fair taxation; and
Implementation of anti–BEPS measures (The OECD’s project on Base Erosion and Profit Shifting).

In response to the developments, governments of the following NTNT enacted legislation introducing enhanced economic substance requirements for tax purposes, bringing the rules into force as from 1 January 2019:

• Bahrain
• Bermuda
• British Virgin Islands
• Cayman Islands
• Isle of Man
• Jersey
• Guernsey
• Mauritius
• Bahamas
• Seychelles
• UAE (30 April 2019)

Economic Substance regulations, UAE:

The UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”), 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

Applicability:

The Regulations apply to all UAE onshore and free zone companies that carry on a “Relevant Activity”. As an exception, entities that are directly or indirectly owned by the UAE government (both federal and local) are specifically excluded from the Regulations.

The following are considered as “Relevant Activities” under the Regulations:

• Banking
• Insurance
• Investment Fund management
• Lease-finance
• Headquarters
• Shipping
• Holding company
• Intellectual property
• Distribution and service centers

The requirement of “Economic substance” test:

To satisfy the Economic substance (“ES”) requirements in relation to a Relevant Activity, a Relevant Entity need to meet the following tests: Conduct the relevant “core income-generating activities” (CIGA) in the UAE; “Directed and managed” in the UAE; The company must be directed and managed in the UAE Directors need to have the necessary knowledge and expertise to discharge their duties as directors BOD meets in the UAE with
adequate frequency and quorum physically present Strategic decisions and minutes of the meeting must be recorded and kept in the UAE With reference to the level of activities performed in the UAE: Adequate number of qualified full-time employees in the UAE Incur an adequate amount of operating expenditure in the UAE Have adequate physical assets in the UAE.

The company can outsource CIGA to a third party service provider as long as it is able to monitor and control the activities Holding companies deriving income only through dividends and capital gains from equity interests, the reduced test applies.

Reporting requirement for relevant Entities:

Relevant Entity will be required to submit an annual report (within 12 months from financial year-end) on its relevant activities to the relevant regulatory authority containing specified details and also declaration on whether ES test has been satisfied.
If the company is a relevant entity but does not conduct the relevant activity, ES tests requirement will not be applicable but it will be required to provide a notification to the regulatory authority as per Article 8(1).

Penalties where the Economic Substance Test is not met

The administrative penalty between AED 10,000 and AED 50,000 (AED 50,000 and AED 300,000 for consecutive non-compliance) will apply for not meeting the ES Tests.

Action plan for businesses

Understand if your entity is in the scope of the economic substance requirements. The key area to be assessed will be whether the entity performs relevant activities. Look at the gaps in the level of economic substance and consider required options where gaps are identified Take actions required for any structural changes or re-organization required in the entities Compliance – To prepare an action plan to ensure compliance with the filing requirements set out in the regulations.