Economic-Substance-Regulations-Tax

Economic Substance Regulations

Economic Substance Regulations

Background

 

The United Arab Emirates has enacted the Economic Substance Regulations[1] (hereafter: ”the 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 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.

What is the scope of the Regulations?

 

The Regulations apply to UAE onshore and free zone companies, including offshore companies, branches, partnerships, and other UAE business forms that carry out “Relevant Activities” (referred as “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 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 Regulations?

 

A UAE entity that is directly or indirectly owned 51 percent or more by the UAE government is exempt from the purview of the Regulations. In this respect, the “UAE Government” includes the UAE Federal Government, as well as governments of any Emirate of the UAE or any government authority or body.

 

First Reportable Period

 

The Regulations applies to Licensees with financial year commencing on or after 1 January 2019.

 

What is substance requirement under the 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
  •  The 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 adequate supervision of 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 Regulations?

The following compliances may be required for companies under the Regulations:

  • All Licensees must submit a Notification to the relevant Regulatory Authority confirming whether they are subject to the Regulations, whether income is received conducting Relevant Activity and if the income is taxable in a third country. The deadline of the notification for the first reportable period is 30 June 2020.

     

  • If the Licensee is subject to the 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.

     

    Consequences for not complying with the Regulations

     

  • Failure to comply would result in administrative penalties (not less than AED 10,000 but not exceeding AED 50,000 in the first year, increased to an amount not less than AED 50,000 but not exceeding AED 300,000 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.
  • Have adequate number of qualified employees, incur adequate expenditure proportionate to the level of activity from an adequate physical presence in the UAE

 

How can Crowe UAE assist you?

 

  • Initial Assessment

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

     

  • Comprehensive Assessment and Gap analysis

    If your business is within the scope of the Regulations, to analyse and identify whether the business fulfils the Economic Substance Test under the Regulations and identify the non-compliant aspects if the criteria of the 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

Assistance in filing the Notification and Substance Return with the relevant Regulatory Authority.

Ongoing review services to ensure ongoing compliance of the company with the Regulations.



[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