The UAE has recently published its new economic substance (ES) legislation.
The law went into effect on April 30th, 2019, and is intended to ensure the UAE’s removal from the EU’s blacklist of uncooperative jurisdictions.
The EU blacklisted the UAE in December 2017 as a non-cooperative tax jurisdiction, along with 16 other countries.
The UAE was included in the list because the EU deemed it to be a jurisdiction that facilitates offshore structures or arrangements aimed at attracting overseas profits that do not reflect real economic activity in the country.
The recent introduction of the ES legislation should result in the UAE’s removal from the list.
The Economic Substance (ES) Legislation
The UAE ES legislation follows the set of rules as stipulated in the ‘Scoping Paper’ that the EU Code of Conduct Group on Business Taxation published in 2018. The UAE ES law is similar to recently-introduced legislation in the British Virgin Islands, Cayman Islands and the Bahamas.
The ES legislation will require UAE corporations performing geographically mobile activities to have sufficient substance in the UAE; a newly-introduced annual reporting regime serves as the means of enforcement.
Who does the legalisation apply to?
The ES regulations apply to companies engaged in core income-generating activities (CIGA) including banking, insurance, fund management, financing and leasing, headquarter companies, shipping business, investment holding, IP activities and distribution and service centres.
To meet the ES requirement, companies will need to satisfy the following three tests:
- The company should be directed and managed in the UAE for the specific activity;
- The company’s CIGA should be performed in the UAE;
- The company should have an adequate level of qualified employees, premises and annual operating expenditures.
Relevant companies should ensure that their boards have frequent documented meetings in the UAE, and all the records should be kept within the country.
For legal entities such as branches and representative offices, the manager must be physically present in the UAE when making the main decisions.
Entities may outsource CIGA activities – except ‘high risk’ IP – provided the outsourced operations are carried out inside the UAE, and the entity retains full control over those activities.
Entities carrying out relevant activities falling within the regulatory must prepare and submit a report to the supervisory authority that demonstrates that they satisfy the ES test, no later than 12 months after the end of every financial year.
The regulatory authority will then submit the report to the competent jurisdiction, the UAE Ministry of Finance.
Corporations impacted under the new legislation will need to prepare and submit to the regulatory authority a report no later than 12 months after the end of the corporate’s financial year.
With the rules coming into effect on April 30th, 2019, the first reporting for existing corporations should be done in 2020.
The report will contain mandatory information, which includes:
- The value and type of income related to the Relevant Activity;
- The location of the activity and the manufacturer, property or equipment used to conduct the Relevant Activity;
- The number of employees, their qualifications and the number of people responsible for administering the Relevant Activity; and
- A disclosure stating that the corporate has met the ES requirements.
Fines of up to Dhs50,000 will be imposed for late reporting. Fines of up to Dhs300,000 and possible licence suspension, deregistration or even compulsory liquidation will apply for failure to meet the mandatory substance requirements.
The new ES legislation is another step in the right direction to the UAE becoming a fully-compliant international player within the global tax community. The legalisation ensures that corporate economic entities report their profits and pay the required taxes where these profits are generated. This new guidance provides a clear framework. It is another rubber stamp of the country’s standing as a premier business destination. Our team of consultants will be able to assist clients in determining the most suitable structures to meet their requirements.
For more information and to book an initial consultation with one of our specialist advisors, please email us at email@example.com.
CEO, Europe Emirates Group