The United Arab Emirates (UAE) introduced Economic Substance Requirements (ESR) with Cabinet of Ministers Resolution No. 31 on 30 April 2019, which are applicable as of 1 January 2019. Subsequently, guidance on the application of the regulations was issued on 11 September 2019. With the release of another guidance note, in the form of Relevant Activity Guide (RAG) released on 15 April 2020, the Ministry of Finance continues their efforts to clarify the scope and coverage of listed economic activities and their associated core income generating activity test (CIGA).
The RAG stipulates that UAE entities should adopt a “substance over form” approach while assessing the applicability of ESR. This requires them to take into consideration all activities they have performed, irrespective of the ones stated on the respective business licenses issued by UAE licensing authorities (free trade zone or otherwise). When a company (licensee) undertakes multiple relevant activities during the financial period, it will be required to demonstrate substance for each relevant activity, unless the activity is considered ancillary to the main relevant activity (materiality test). Under certain circumstances, consolidated reporting of ancillary activity could prevent duplicate reporting and, subject to the fact pattern, could be plausible for banking, lease-finance, headquarters and distribution and services center operations.
The RAG seems to suggest that demonstration of economic substance for a particular economic activity is required only if any gross income was generated from such economic activity during the financial period, irrespective of the form the income was realized. Actual undertaking of CIGA and requirement of key decision makers of the CIGA to be present in the UAE are some highlights of RAG.
The RAG also provides several examples of typical scenarios for each relevant activity observed in the market; and encourages organization to seek professional advice if a business is unable to determine whether it conducts a relevant activity.
In summary, the RAG sheds light on key elements of ESR adoption. This is a step in the process of embracing the adoption of ESR in this first year of compliance to BEPS Action 5.
A detailed review of the new guidance will be prepared in the weeks to come.