New regulations have been issued in Cabinet of Ministers Resolution No. 31 of 2019, dated 30 April 2019.
New regulations have been issued in Cabinet of Ministers Resolution No. 31 of 2019, dated 30 April 2019. They introduce a legal requirement for all UAE entities to locally maintain ‘economic substance’ in line with the level and type of activity they undertake. Economic substance can broadly be considered to consist of employees, premises, management, and costs. There are also various regulatory filing requirements that need to be met in order to comply with the regulations.
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. The regulations should also assist in further aligning UAE’s legislative framework to the standards set out in the OECD Base Erosion and Profit Shifting (BEPS) action plan. The regulations are similar to economic substance requirements recently implemented in jurisdictions such as the Cayman Islands and Jersey.
All UAE entities will need to examine whether they meet the ‘economic substance’ requirements and consider how they will comply with the regulations, either by bolstering UAE economic substance or restructuring.
The regulations apply from the date of issuance of the Resolution, i.e. 30 April 2019
Which entities are in scope?
Any UAE entity that undertakes “Relevant Activities” which consist of any of the following businesses licensed in the UAE, (mainland and/or free trade zones):
— Investment fund management
— Lease finance
— Holding company
— Intellectual property
— Distribution and service centers
Commercial companies that have any level of direct or indirect government (state and/or federal) ownership are currently out of the scope of the Regulations.
What are the economic substance requirements?
Where an entity is undertaking Relevant Activities the following requirements apply:
— The entity must undertake its key business activities in relation to relevant activities (“core income-generating activities” (CIGA) in the UAE. Details on what constitutes CIGA for each relevant activity are set out in the regulations.
— The entity must be directed and managed in the UAE in relation to CIGA.
— The entity’s activities must be carried out with adequate local “economic substance” with regard to the level of relevant activity in the UAE. Economic substance consists of:
- Full-time employees
— Entities will also be required to provide certain information to their regulatory authority annually, within a year of the financial year-end. If the entity is undertaking relevant activities it will be further required to submit a detailed report to the regulatory authority in relation to various aspects of the economic substance it maintains in the UAE, including a self-declaration that the economic substance requirements are met.
Can the economic substance requirements vary depending on what relevant activities are performed by the entity?
Yes, there are certain exceptions and variations on the economic substance requirements, depending on the relevant activities undertaken by the entity:
— Entities undertaking certain “high-risk intellectual property” business will be subject to relatively higher standards of economic substance and more detailed reporting requirements.
— Entities undertaking equity holding company business are subject to a relatively reduced level of economic substance requirements.
— Where an entity outsources its activities to service providers it may still be able to meet economic substance requirements, provided its service providers conduct the activity in the UAE, and the entity must be able to demonstrate adequate supervision of the outsourced activity.
What happens if an entity does not meet the economic substance requirements?
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.
What should groups with entities in the UAE do now?
— Impact assessment
Understand if any UAE entities are in scope of the economic substance requirements. The key area to be assessed will be whether the entity performs relevant activities.
UAE entities that hold intellectual property and those that outsource a significant amount of their activities will be particularly affected.
Multinational groups should also consider substance requirements in other jurisdictions, in particular – but not limited to – Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, and Luxembourg.
— Gap analysis and remediation
Identify gaps in level of economic substance in affected entities and consider remediation options where gaps are identified.
Groups may consider legal entity or contract restructuring versus simply increasing the level of economic substance in an entity.
Commercial, legal and regulatory factors should be considered in any remediation plan. The broader international tax position of the group, including transfer pricing, withholding tax and VAT impact should also be considered.
Identify an action plan for compliance with the filing requirements set out in the regulations.
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