Economic-Substance-Regulations-Tax

Economic Substance Regulations

Economic Substance Regulations

Background

 

The United Arab Emirates (hereafter: “UAE”) has enacted the Economic Substance Regulations[1] (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Substance Requirements (hereafter: ”the Amended Regulations”) along with the Ministerial Decision no 100 of 2020 which repealed and revoked the Erstwhile Regulations and the earlier associated laws.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.:

  1. Banking Business
  2. Insurance Business
  3. Investment Fund Management Business
  4. Lease-Finance Business
  5. Shipping Business
  6. Holding Company Business
  7. Intellectual Property Business
  8. Headquarter Business
  9. Distribution and Service Centre Business

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 Activityregardless 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:

  1. An Investment Fund. 
  2. A tax resident in a jurisdiction outside the UAE. 
  3. An entity is wholly owned by UAE residents and that (i) does not form part of a multinational group, and (ii) only exclusively carries out business activities in the UAE. 
  4. A branch of a foreign entity whose relevant income is subject to tax in the jurisdiction of the foreign entity.

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.

  • Conduct the relevant “core-income generating activity” in UAE
  • Be “directed and managed” in UAE
  • Have adequate number of qualified employees, incur adequate expenditure proportionate to the level of activity from an adequate physical presence in the 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:

  • All Licensees and Exempted Licensees must submit a Notification confirming the Relevant activity that is being carried out, whether income is generated conducting Relevant Activity and the date of commencement and end of financial year. The Notification must be filed electronically on the Ministry of Finance Portal within 6 months from the end of the Licensee’s financial year. The Licensees that have already submitted a notification to their Regulatory Authorities for financial year 2019 are required to re-submit their notification on the Ministry of Finance portal; the deadline for re-submission is yet to be announced.
  • If the Licensee is subject to the Amended Regulations, then it must also submit a Substance Return to the relevant Regulatory Authority demonstrating its substance annually no later than twelve months from the end of each financial year (commencing on or after 1 January 2019). The first substance return is due by 31 December 2020 for companies with a financial year ending on 31 December 2019.

    Authorities under the Amended Regulations

  • National Assessing Authority
  • Regulatory Authority
    • The Regulatory Authorities’ will now have the primary responsibility to collect and verify the information regarding their Licensees and assisting the FTA in carrying out its role as National Assessing Authority.
  • Competent Authority

    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

  • Failure to comply would result in following administrative penalties:
    • Failure to file notification – AED 20,000
    • Providing inaccurate information - AED 50,000
    • Failure to submit substance report - AED 50,000
    • Failure to fulfil economic substance test – AED 50,000

    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.

  • The Regulatory authorities may also impose other penalties which include but are not limited to suspension, revocation, or non-renewal of a Licensee’s license.
  • In addition, the UAE authorities may disclose information to the foreign competent authorities. The information exchange with foreign competent authority will be of the parent company, the ultimate parent company, and the ultimate beneficial owner.
  • The UAE Federal Tax Authority (hereafter: “FTA”) has been appointed as the National Assessing Authority. The FTA will be responsible to (i) assess whether licensees have met the economic substance tests; (ii) impose administrative penalties for non‑compliance; and (iii) hear and decide on appeals filed by licensees, among other.

How can Crowe UAE assist you?

  • Initial Assessment
  • Comprehensive Assessment and Gap analysis

    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.

  • Corporate actions to meet Economic Substance Test

    Suggestions and implementation of corrective or preventive corporate actions to fulfil the requirements of the company under the Economic Substance Test.

  • Compliance Assistance
  • Identify whether your business is within the scope of the Amended Regulations by analysing whether the company is a Licensee conducting Relevant Activity in the Reportable Period. We identify the compliance requirements for the company. 

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.



[1] Cabinet of Ministers Resolution No.31 of 2019 concerning Economic Substance Regulations.

Contact us

markus
Markus Susilo
Partner, Tax Advisory
Binit
Binit Shah
Partner, Information Technology
Vivek Batra
Vivek Batra
Partner – Corporate Finance and VAT
Michel-Ruitenberg
Michel Ruitenberg
Director – Tax Advisory