Economic Substance Regulations in UAE. Are you ready to notify of your compliance?
The UAE introduced Economic Substance Regulations to honour the UAE’s commitment as a member of the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on BEPS (Base Erosion and Profit Sharing), and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The issuance on 30 April 2019 of the UAE Cabinet of Ministers Resolution No.31 of 2019 concerning Economic Substance Regulations (the “Regulations”), and the subsequent release of the Guidance on the application of the Regulations (Ministerial Decision No.215 of 2019) on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019. The purpose of the Regulations is to ensure that UAE entities that undertake certain activities (called “Relevant Activities”) are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE.
The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.
The Regulations provide a definition to each of the above Activities. The provisions of the Regulations shall not apply to Companies in which the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital.
The Regulations apply to financial years commencing on or from 1 January 2019. Entities will need to submit a notification to their Regulatory Authority (defined under Cabinet Decision No (58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards, and prepare and submit to the same Regulatory Authority an economic substance declaration within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). Current notification is for financial year from 1 January 2019 until 31 December 2019. In particular, the free zone entities are required to submit economic substance notifications to a relevant Free Zone Authority an many of them set up a deadline for submission of such notification is 30 June 2020 (DIFC, DMCC, Ras Al Khaimah, DAFZA, etc).
As per Clause 8 of Regulations, the Licensee shall submit to the Regulatory Authority a Notification confirming;
a) Whether or not it carries out a Relevant Activity;
b) Whether or not all or any part of the Licensee’s gross income in relation to a Relevant Activity is subject to tax in a jurisdiction outside the UAE; and
c) The date of the end of its financial year.
Whilst the commercial license may indeed state the Relevant Activity, a ‘substance over form’ approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the Regulations. This means looking beyond what is stated on the commercial licence to the activities actually undertaken by the Licensee during a financial period.The UAE Ministry of Finance published the Economic Substance flow-chart to help any entity to establish its compliance.
Failure by an entity to comply with the Regulations shall result in administrative penalties (for example, failure to notify can trigger a penalty from AED10,000 until AED50,000), spontaneous exchange of information with the Foreign Competent Authority and potential suspension, revocation or non-renewal of its registration.
For each financial period in which a Licensee earns income from a Relevant Activity, it will need to meet an Economic Substance Test in relation to that activity. The Economic Substance Test requires a Licensee to demonstrate that:
? the Licensee and Relevant Activity are being directed and managed in the UAE;
? the relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE; and
? the Licensee has adequate employees, premises and expenditure in the UAE.
The UAE Ministry of Finance recommends the following non-exhaustive list of matters a Licensee should consider (and action, where relevant) to comply with Economic Substance Regulations:
? Assess what (if any) Relevant Activities it has performed during the financial period (applying a “substance over form” approach);
? Assess the amount and type of income earned (if any) from the Relevant Activity during the financial period;
? Hold board meetings with a quorum of directors physically present in the UAE;
? Ensure board meeting minutes are signed and maintained in the UAE;
? Identify the amount and type of expenses and UAE based assets (incl. premises) in respect of the Relevant Activity, and ensure access to assets (incl. premises) can be demonstrated (through agreements and financial records)
? Identify the number of UAE based full-time employees or other personnel (and their qualifications) responsible for carrying on the Licensee’s Relevant Activity; and
? Ensure control and supervision over any outsourcing arrangements can be demonstrated, e.g. through contractual agreements.
Additional actions may be required to ensure a Licensee can demonstrate sufficient economic substance in the UAE for a relevant financial period, and the considerations above may differ where a Licensee has either a Holding Company or a High Risk IP Business. ?????