The UAE
Economic Substance Regulations (ESR) are in force. The ESR applies to all
businesses in the UAE.
The regulations were issued in response to European Commission concerns which resulted in the UAE being added to the list of non-cooperative tax jurisdictions within the European Union. In addition, the regulations should assist in further aligning UAE's legislative framework with the standards outlined in the OECD Base Erosion and Profit Shifting (BEPS) action plan.
UAE entities will need to determine whether they meet the 'economic substance' requirements and determine how they will comply with the regulations, either by bolstering UAE economic substance or restructuring their operations.
When do
the economic substance regulations apply from?
It is important to note that the regulation is effective from the date of issuance of the resolution, which is 30 April 2019.
Activities
that fall under Economic Substance Regulations in the UAE?
UAE
entities engaging in "Relevant Activities," which may include any of
the following businesses licensed in the UAE (mainland or free trade zones):
Companies
owned by governments (states, federals, etc.) are currently excluded from the
Regulations.
1.
Banking
2.
Insurance
3.
Investment fund management
4.
Lease Finance
5.
Headquarters
6.
Shipping
7.
Holding company
8.
Intellectual property
9.
Distribution and service centers
To
demonstrate that your business meets the ESR requirements, your business may
also need to file an economic substance return ("ES Return"), within
12 months of the end of your financial year.
What are
the economic substance requirements?
Where an
entity is undertaking Relevant Activities, the following requirements apply:
1.
Core
Income Generating Activities (CIGA) are the activities that generate
income for the entity in the UAE. The regulations define what constitutes CIGAs
for each relevant activity.
2.
In relation to CIGA, the entity
must be directed and managed in the UAE.
3.
An entity's activities must be
carried out with adequate local "economic substance" with regard to
the level of relevant activity in the UAE. The economic substance consists of: –
Full-time employees – Expenditures – Property.
4.
A certain amount of information
will also need to be provided to a regulatory authority by entities within a
year of the end of their financial year. An entity that is undertaking relevant
activities must also provide a detailed report to the regulatory authority
regarding the economic substance it maintains in the UAE, including a
self-declaration that the requirements for economic substance are met.
What is required under the Economic Substance
Regulations?
In accordance with the Economic Substance
Regulations, every Licensee who engages in one or more Relevant Activities must
notify the appropriate regulatory authority.
Furthermore, any Licensee conducting one or more
of the Relevant Activities and generating income from the Relevant Activities
in the UAE will be required to complete an “economic substance test” and submit
an economic substance report to the appropriate regulatory authority within 12
months of the end of the relevant financial period.
In order to qualify for the exemption, the company
must be at least 51% owned by the government of the UAE or an Emirate
government.
According to the Relevant Activity and the
location where it is undertaken, the regulatory authority will determine the
form and mechanism for filing reports.
Penalties under the UAE Economic Substance
Regulations?
1.
AED10, 000 - AED50, 000 penalty
for failure to file a Notification
2.
If you fail to provide accurate
or complete information, you will be fined AED10,000 - AED50,000
3.
Failure to demonstrate sufficient
economic substance in the UAE for the relevant Financial Year.
Our
experienced team will be happy to analyze your business activities, determine
whether you are within the rules and guide you as to what actions are required
to ensure full compliance.
Please get in touch with:
Mr. Faisal Salim
+971 52 2037461
