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.
Relevant
Activities:
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.
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. ?????
