The United Arab Emirates (hereafter: “UAE”) has enacted the Economic Substance Regulations (hereafter: ”the Erstwhile Regulations”) on 30th April 2019, which requires companies to have substantial activities in the UAE, taking into account the global standards developed by the OECD and the EU for business taxation to prevent harmful tax practices and to be removed from the EU’s list of non-cooperative tax nations.
The Economic Substance Regulations brings the specific requirements for businesses to demonstrate that their actual economic activity is in UAE and it is not driven solely to benefit from a low or non-tax jurisdiction. Thus, preventing the harmful tax practice of profit shifting from high-tax jurisdiction to low tax regimes.
On 10th August 2020, UAE introduced New Economic Substance Regulation vide Cabinet of Ministerial Resolution no 57 of 2020 concerning Economic Substance Requirements (hereafter: ”the Amended Regulations”) along with the Ministerial Decision no 100 of 2020 which repealed and revoked the Erstwhile Regulations and the earlier associated laws. So, the entities will now have to comply with the Amended Regulations.
What is the scope of the Amended Regulations?
The Amended Regulations apply to a juridical person (incorporated inside or outside of UAE) or an unincorporated partnership registered in the State, including a Free Zone and a Financial Free Zone that carries on a Relevant Activity (hereafter: “Licensee”) listed below.:
The Amended Regulations, thus, applies to a limited liability company, a private shareholding company, a public shareholding company, a joint venture company, a partnership (a limited liability partnership, a limited partnership, a general partnership, etc.), but does not apply to a natural person, sole proprietorship, trust, and foundation, that were covered in the Erstwhile Regulations.
The Amended Regulations applies not only to UAE entities that are part of a foreign multinational group, or that are owned by a foreign shareholder but to any UAE entity which carries on a Relevant Activity, regardless of whether the UAE entity belongs to a foreign multinational group.
Who is exempt under the Amended Regulations?
The Amended Regulations has introduced Exempted Licensee that are entities that do not have to fulfil the requirements under the Amended Regulations, however they will have to file a notification along with a documentary evidence that they are eligible to claim the exempt status. An entity would qualify as an Exempted Licensee if it were a Licensee and is:
The exemption indicated in the Erstwhile Regulations for entities directly or indirectly owned to at least an extent of 51 percent by the UAE government is no longer specifically exempted under the Amended Regulations.
First Reportable Period
The Amended Regulations applies to Licensees with financial year commencing on or after 1 January 2019.
What is substance requirement under the Amended Regulations?
A Licensee operating any of the Relevant Activity shall have economic substance in the UAE only if it fulfils the following economic substance requirements for each of its Relevant Activity in UAE.
The Amended Regulations allows a company to outsource some or all of its activity to third-party service providers; however, these service providers must in their own right have adequate presence in the UAE and the company must be able to demonstrate that it has full control and is able to monitor and adequately supervise the outsourced activities.
Further, a UAE entity that only undertakes a “Holding Company Business” will be subject to less stringent economic substance requirements, whereas there are additional requirements apply if a Relevant Entity carries out “High Risk IP Business”.
What are the compliances to be fulfilled under the Amended Regulations?
The following compliances may be required for companies under the Amended Regulations:
Authorities under the Amended Regulations
The Ministry of Finance is the Competent Authority who is responsible to provide information to the Foreign Competent Authority.
Consequences for not complying with the Amended Regulations
If failure continues in the second consecutive year, the amount of penalty is increased to an amount of AED 400,000 in the subsequent year.
How can Crowe UAE assist you?
If your business is within the scope of the Amended Regulations, to analyse and identify whether the business fulfils the Economic Substance Test under the Amended Regulations and identify the non-compliant aspects if the criteria of the Amended Regulations are not met.
Suggestions and implementation of corrective or preventive corporate actions to fulfil the requirements of the company under the Economic Substance Test.
Assistance in filing / re-filing the Notification and Substance Return with the Ministry of Finance.Ongoing review services to ensure ongoing compliance of the company with the Amended Regulations.Assistance in preparing any documentation, or review of information that needs to be submitted to authorities.
 Cabinet of Ministers Resolution No.31 of 2019 concerning Economic Substance Regulations.