UAE Economic Substance Test

UAE Economic Substance Test Insights

6/27/2022
UAE Economic Substance Test
UAE Economic Substance Test Insights

The UAE entities that have earned income from any Relevant Activity specified under the Economic Substance Regulations (“ESR”) must demonstrate adequate substance in the UAE relating to such Relevant Activity by satisfying the Economic Substance (“ES”) Tests provided under the ESR.

We have provided below an overview of the ES Test and several strategies for mitigating the risk of non-fulfilment of the ES Test.

  • Key principles of the ES Test
    • Core Income Generating Activity (“CIGA”) Test
      • Conduct core activities in the UAE.
      • Outsourcing of CIGA allowed subject to certain conditions.
    • Directed and Managed Test
      • Business to be directed and managed from the UAE through holding and minuting board meetings in the UAE, having a UAE based manager and/or directors etc.
    • Adequacy Test
      • Have adequate number of qualified employees, premises ,and annual operating expenditures in the UAE.
  • Implications of non-fulfilment
    • Levy of penalty up to AED 400,000.
    • Implies that the company is not undertaking genuine economic activities and is allegedly used for avoiding paying taxes resulting in an adverse tax impact.
  • Risk mitigation strategies to avoid non-fulfilment of the ES Test
    • Ensure that the activities that are of central importance in generating income from a Relevant Activity is conducted in the UAE.
    • Conduct adequate board meetings in the UAE and document the minutes of the meetings in writing.
    • Appoint Directors possessing requisite skill and expertise to take strategic decisions related to the Relevant Activity. Verify physical presence of the directors in the UAE.
    • Have adequate number of qualified employees, premises, and operating expenditure in the UAE relative to the Relevant Activity.
    • Have adequate “supervision and control” in case of outsourcing arrangements. Ensure that the outsourced CIGA is conducted in the UAE.
  • How can Crowe help?
  • Undertake a GAP analysis to Identify gaps between the existing substance and the level of substance required under the ESR and advise on remedial actions and other measures to ensure fulfillment of ES Test and compliance with the ES requirements.
  • Advise on how to document that Relevant Activities are being “directed and managed” from the UAE through board meeting minutes and other record keeping. Also, advise on the appropriate level of adequacy (relative to the activities undertaken) to be maintained in the form of management and in the form of operational activities.

Contact Us

Markus Susilo
Markus Susilo
Partner, Tax Advisory
Alessandro Valente
Alessandro Valente
Manager - International Tax Service & Transfer Pricing