A few months ago the UAE Cabinet issued the Cabinet of Ministers Resolution No. 31 of 2019, requiring all in-scope UAE entities that carry on a few activities to have evident economic substance in the UAE from 30 April 2019. The companies who will not follow these rules could risk fines and penalties, suspensions, removal or non-renewal of licenses, and the revelation of their position to other external authorities.
Why has the UAE Issued the Resolution?
The European Union in the month of March 2019, published an updated list of non-cooperative tax jurisdictions, which involved the UAE for not delivering on its commitment to fulfilling with the EU’s right governance criteria. Since then the UAE has provided new legislation under Cabinet Resolution No. 31 of 2019 which stipulates the requirements for businesses to have economic substance or a presence in the UAE. Even though the resolution was published on June 19, 2018, compliance with the requirements has been in force since April 30, 2019.
Who is Subject to the Regulations?
The new regulation applies to all the UAE onshore and free zone companies that carry on a ‘Relevant Activity.’ It is yet to be established whether the Regulations will also apply to sole proprietorships, and branches, but it is expected that the entities incorporated under offshore (free zone) companies regulations that carry on a ‘Relevant Activity’ to be within the scope of the Regulations. The following are activities are considered to be relevant under the Regulations-
- Insurance
- Banking
- Lease-finance
- Fund Management
- Headquarters
- Shipping
- Holding Company
- Intellectual Property (IP)
- Distribution and Service Centre
The entities that are directly or indirectly owned by the UAE government are expressly excluded from the Regulations. On this basis, the UAE sovereign investment funds and other UAE government-related entities would not meet the UAE economic substance requirements.
What are the Economic Substance Requirements?
To satisfy the economic substance requirements about a relevant activity, the activity must-
- Conduct the appropriate ‘core income-generating activities’ in the Emirates
- Be directed and managed in the Emirates, and
- Concerning the level of activities executed in the UAE:
- Have a proper number of capable full-time employees in the UAE
- Incur a fair amount of operating expenditure in the UAE
- Have sufficient physical assets in the UAE
A Relevant Entity that only embarks on a Holding Company Business will be subject to less rigorous economic substance requirements. Supplementary requirements apply if a Relevant Entity carries out “high-risk IP related activities.” If a business entity carries out more than one Relevant Activity, the economic substance necessities must be met for each of the Relevant Activities
Endnote
The introduction of the Regulations in the UAE brings the country in-line with other jurisdictions that have recently issued economic substance legislation like Bermuda, Cayman Islands, and Mauritius and affirms the UAE’s commitment in addressing concerns around the shifting of profits derived from certain mobile business activities to ‘no or nominal tax jurisdictions’ without equivalent local economic activities. This should also be seen as the Emirates making optimistic progress towards meeting the EU’s requirements to be detached from the EU list of non-cooperative jurisdictions for tax purposes
The regulation will have a limited impact on the UAE –headquartered businesses and foreign multinationals that have certain commercial operations and management in the UAE. For corporations that undertake Relevant Activities in the Emirates but are managed remotely, the governance structure and operating model should be reassessed in the light of the Emirates economic substance requirements, and any essential adjustments should be made to guarantee compliance with the Regulations.
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When did the UAE Cabinet’s Resolution No. 31 come into effect?
30th April 2019.
What will happen to the companies that would not follow the UAE economic substance rules?
Those companies would have to pay fines, face penalties, removal or non-renewal of licenses, suspensions, and their positions would be revealed in front of other external authorities.
Why did ESR in UAE happen?
Economic Substance was introduced by the country because in March 2019 the European Union published an updated list of non-cooperative tax jurisdictions which didn’t fulfill the commitments as per the EU’s right governance cr
Which activities fall under the UAE ESR?
The activities are banking, insurance, lease finance, headquarters, fund management, shipping, intellectual property, holding property, distribution & service centre.
What if a business entity carries out more than one relevant activity in the UAE?
In that case, each relevant activity should meet the necessities for economic substance.