UAE has recently introduced Economic Substance Regulation, issued in Cabinet of Ministers Resolution No. 31 of 2019, as a result of the assessment of the UAE’s tax framework by the European Union. As a result, all businesses who carry out “Relevant Activities” should be prepared to take necessary steps to ensure compliance.
The following are considered as “Relevant Activities” as per the regulations (mainland and/or free trade zones):
- Banking
- Insurance
- Investment Fund management
- Lease
- Headquarters/Holding company
- Shipping
- Intellectual property (“IP”)
- Distribution and Service Centre
In order to comply with the requirements, all UAE entities who conduct “Relevant Activities” are required to comply with the regulatory filing requirements. Entities that are directly or indirectly owned by the state or central government are exempt from complying regulations.
Requirements that needs to be met
- The following requirements should apply in order to satisfy the economic substance regulation:
- The entity should be carrying out their core income generating business in the UAE.
- The entity should be directed and managed in the UAE.
- The entity should have adequate number of qualified full-time employees to perform the relevant activities and have physical asset in the UAE.
- The entity should also incur adequate expenditure in the UAE.
Consequences for Non-compliance of the Requirements
Failure to notify or failure to provide accurate or complete information would lead to a penalty between AED 10,000 to 50,000. The penalties are subject to increase up to AED 300,00 if the requirements are not met in consecutive years. Authorities have the right and may suspend, revoke or deny renewal, if an entity fails to meet the requirements continuously.
Steps that needs to be performed now
- Analyze whether the activities carried by your business in the UAE are subject to the economic substance requirements.
Economic substance regulation UAE over form should be followed while determining whether a “Relevant Activity” is taking place in the entity.
- Notify the Regulatory body if the entity is undertaking any “Relevant Activity”.