On 30 April 2019, the United Arab Emirates (UAE) issued Cabinet Decision No. 31 of 2019 concerning Economic Substance Requirements (Regulations) in response to the European Union Code of Conduct Group’s assessment of its tax framework. As a result, the Regulations require certain businesses and companies in the UAE to maintain an adequate economic presence relative to the activities they undertake.
Considering that the first filings under the Regulations start in the year 2020, we understand that you may benefit from an assessment of whether you are required to comply with the Regulations and to what extent. Accordingly, we wish to take this opportunity to brief you on the Regulations and highlight legal and practical measures which you should consider at this stage.
ECONOMIC SUBSTANCE REGULATIONS
Which entities and businesses in the UAE are required to comply with the Regulations?
The Economic Substance Regulations apply to all juridical and natural persons that have a license from a UAE authority to exercise a Related Activity. The Regulations capture all persons and entities in mainland UAE, free zones, financial free zones, and offshores of the UAE.
What is a Related Activity?
Any one of the following businesses is considered to be Related Activity and must comply with the Regulations:
- Banking,
- Insurance,
- Investment fund management,
- Finance and leasing,
- Head office work,
- Shipping,
- Holding company,
- Intellectual property, and
- Distribution and service provision centres.
Are there any exceptions to the Regulations?
Yes. Companies wherein the government, including the federal government, or any of its authorities or affiliated entities owns, directly or indirectly, at least 51% of the share capital are exempt from the Regulations.
What is the Economic Substance Test?
The purpose of the Regulations is to establish the requirements that a business must comply with for it to be considered to have economic substance. In general, the economic substance tests aims to determine:
- Whether the licensee and the Relevant Activity are being directed and managed in the UAE;
- Whether the core income generating activities (CIGAs) are being conducted in the UAE; and
- The licensee has adequate employees, premises, and expenditure in the UAE.
COMPLYING WITH THE REGULATIONS
If I conduct a Related Activity, what do I need to do?
Firstly, an assessment of your Related Activity and its CIGAs should be undertaken to determine what filings you are required to submit. Additionally, if your business is part of a group of companies or outsources some of its CIGAs, an analysis as to the group and the ultimate parent entity as well as the control you exercise over the portions outsourced should form part of the assessment.
Generally, there are 2 filings required by the Regulations: (i) an economic substance notification; and (ii) an economic substance return for the business’ fiscal year. Both filings should be submitted annually to the Regulatory Authority which shall depend on your Related Activity and the authority that issued your license.
Undergoing an assessment will help you define your obligations. For example, all entities are required to submit an economic substance notification. However, only entities that carry out a Related Activity and generated an income during its fiscal year 2019 are required to file the economic substance return.
What is the difference between the two types of filings?
The economic substance notification is a general submission wherein you indicate whether you are engaged in the Related Activity, whether the income generated from the Related Activity is subject to tax regulations outside of the UAE, and the date when the fiscal year ends for your business. Depending on your Regulatory Authority, either all entities or only those conducting a Related Activity are required to submit the economic substance notification.
The economic substance return, on the other hand, is a more detailed report that includes the type of activity engaged in, the value and type of income received, the location of the activity in the UAE, and the number of full-time employees and their qualifications, among others. All entities that conducted a Related Activity and generated income from these activities are required to file the economic substance return.
When does the reporting start and when should I file?
The Regulations apply to financial years starting on or after 1 January 2019.
Filing the economic substance notification shall depend on the deadline provided by your Regulatory Authority. The following upcoming deadlines have been put in place:
- Dubai International Financial Centre (DIFC): 12 June 2020;
- Abu Dhabi Global Market (ADGM): 30 June 2020;
- Dubai Aviation City Corporation (DACC): 7 June 2020;
- Khalifa Industrial Zone (KIZAD): 20 June 2020;
- Ajman Free Zone (AFZ): 30 June 2020;
- Dubai Multi Commodities Centre (DMCC): 30 June 2020;
- Dubai World Trade Centre (DWTC): 30 June 2020;
- Ras Al Khaimah Economic Zone (RAKEZ): 30 June 2020;
- Ras Al Khaimah International Corporate Centre (RAKICC): 30 June 2020;
- Sharjah Airport International Free Zone (SAIF Zone): 30 June 2020;
However, filing of the economic substance return is due no later than 12 months after the end of your business’ fiscal year.
What are the consequences for non-compliance with the Regulations?
The penalties for not complying with the Regulations, including not meeting the Economic Substance Test or not furnishing information as required by the Regulatory Authority, have administrative penalties ranging AED 10,000 to AED 50,000. Should the business fail to meet the Economic Substance Test for a second consecutive occasion, then the administrative fee shall be between AED 50,000 and AED 300,000, and the Regulatory Authority may suspend, withdraw or not renew the business’ license.
Furthermore, in the event the licensee does not meet the Economic Substance Test, the Regulatory Authority shall provide to the UAE Ministry of Finance the filings submitted which, in turn, shall be provided to the competent foreign authority where the parent company and the beneficial owner reside or where the licensee was founded.
WAY FORWARD
Meeting the Economic Substance Test and submitting the filings imposed by the Regulations are of the utmost importance and must be complied with. Failure to do so may expose your business to administrative fines, inability to continue your Related Activity and/or repercussions in foreign jurisdictions (if applicable to you).
Should you have any specific questions regarding whether you fall under the purview of the Regulations, whether you meet the Economic Substance Test and/or your filing obligations, please do not hesitate to contact us.
