The UAE Introduced Economic Substance Regulations – How Does This Affect You?

In response to concerns of illegal tax practices, the UAE was placed on the EU’s blacklist of uncooperative jurisdictions in 2017. In response, the UAE published its new economic substance legislation and the law was amended in 2020, removing the UAE from this list. Even though the UAE is no longer on the blacklist, its companies must continue to meet the new economic substance regulations for UAE companies. 

EU Blacklisting

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 the real economic activity of the country.

However, after the UAE took measures to combat the EU’s concern of harmful tax practices, the EU removed the UAE from the blacklist. 

The Economic Substance Regulation

The UAE Economic Substance regulations follow the set of rules stipulated in the Scoping Paper that the EU Code of Conduct Group on Business Taxation published in 2018. The UAE economic substance rules are similar to recently introduced legislation in the British Virgin Islands, the Cayman Islands and the Bahamas.

With this regulation, UAE corporations conducting offshore or international business must have sufficient substance in the UAE; a newly-introduced annual reporting regime serves as the means of enforcement.

To whom does the legalisation apply?

The economic substance 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:

1.   The company must be directed and managed in the UAE for the specific activity

2.   The company’s CIGA must be performed in the UAE

3.   The company must have an adequate level of qualified employees, premises and annual operating expenditures

Relevant companies should ensure that their Board of Directors has frequent and documented meetings in the UAE and all records must 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 decisions.

Entities may outsource CIGA activities (except “high risk” IP),  provided that 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 system must prepare and submit a report to the supervisory authority that demonstrates that they satisfy the economic substance requirements no later than 12 months following the end of every financial year.

The regulatory authority will then submit the report to the competent jurisdiction, the UAE Ministry of Finance.

Reporting

Corporations impacted by the new legislation will need to prepare and submit a report to the regulatory authority no later than 12 months after the end of the corporation's financial year. 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
• A disclosure stating that the corporation has met the UAE economic substance requirements.

Fines

Fines of up to AED 50,000 will be imposed for late reporting and fines of up to AED 300,000 and possible license suspension, de-registration or even compulsory liquidation will apply if a company fails to meet the mandatory substance requirements.

The new economic substance legislation is another step in the right direction to ensuring the future of the UAE as a fully-compliant international player within the global tax community. The legislation ensures that corporate economic entities properly report their profits and pay the required taxes where these profits are generated. 

These new regulations provide a clear framework; they are proof of the country’s standing as a premier business destination. Our team of consultants are ready to assist clients in determining the most suitable structures to meet requirements. For more information and to book an initial consultation with one of our experts, contact us today. 

Written by 

Adrian Oton

CEO, Europe Emirates Group