Economic Substance Regulations is another compliance requirement for entities registered in the UAE. The United Arab Emirates (UAE) Ministry enacted the Cabinet Resolution no. 31/2019 with effect from 30th April 2019 on Economic Substance Regulations in the UAE. This was followed by the Ministerial Decision 215 for the year 2019 giving directives for the implementation of the provisions of Cabinet Decision no. 31/2019.
The European Union is working to have a Tax Governance at Global Level in order to curb the Tax avoidance, evasion. The Economic Substance Regulations is in consonance with the global standard set by Organization for Economic Co-operation and Development (OECD) on Harmful Tax Practices. UAE also joined the all-inclusive framework of OECD on Base Erosion and Profit Shifting (BEPS) and is committed to have the minimum standards in the State. UAE is “No or Only Nominal Tax Jurisdiction” (NOON’s) environment and is in line with other jurisdictions with same environment who are parties to this framework.
The rule is released on 30th April 2019 and is applicable to all Licensee carrying on the Relevant Activities in the UAE, including the Free Zone or Financial Free Zone; with effect from the year 2019.
Investment Fund Management Business
Intellectual Property Business
Holding Company Business
Distribution & Service Centre Business
An entity must satisfy the following key criteria to meet the Economic Substance Test in relation to any Relevant Activity carried on by it:
Conduct relevant “core income-generating activities” in the UAE;
Be “directed and managed” in the UAE in relation to that activity;
With reference to the level of activities performed in the UAE:
Have an 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
Companies in which Government of the State or Government of any Emirate of the UAE or any governmental authority or body of any of them having at least 51% direct or indirect ownership in Company’s shareholding.
A relevant entity must report certain information regarding its relevant activities to the regulatory authority concerned (the one that issued the trade license to the entity), annually. Existing companies should have complied with the regulations by now, since the starting date was 30th April 2019. In the case of new entities, regulations must be complied with upon receiving its trade license.
If an entity fails to meet the requirements or if inaccurate information is given to the regulatory authority, annual administrative penalties of AED 10,000 to AED 300,000 will apply. If they fail to meet the requirements for consecutive years, the penalties will increase and might force the authorities to suspend, revoke or deny renewal of an entity’s license.
S & H can help you get a clear understanding of the new substance requirements applicable in UAE
S & H can conduct an impact analysis – studying and analyzing the effect of the new regulations on your existing businesses
S & H can assist in relevant compliances under the new regulations
You may email us or can contact any of our team members relating to your queries on this subject: