UAE Substance Requirements

The New United Arab Emirates (UAE) Economic Substance Regulations

UAE Company Economic Substance Requirements Compliance

Who Needs to Comply with the New UAE Economic Substance Regulations?

The new United Arab Emirates (UAE) Economic Substance Regulations entered into force on 1st of January 2020, marking a major breakthrough in UAE’s tax policy. In most cases, companies that are registered in the UAE will need to comply with the new economic substance requirements and submit annual declarations.

All UAE entities should be well-prepared to take new steps and ensure the submission of economic substance declarations. Further guidance was published in September 2019, to clarify issues concerning the application of the Regulations.

From the date of January 1, 2020, these regulations went into effect. It is likely that your company will need to comply with the Economic Substance Regulations by the end of 2020. If you are interested in how to complete these legal obligations, Shanda Consult can help. Here is some additional information about the new regulations.

Which Entities are Subject to the Regulations?

The Economic Substance Regulations extend to UAE onshore (Mainland) and free zone businesses, subsidiaries, foundations, non-profit organizations and other UAE business forms that participate in one or more of the following “Relevant Activities”:

  • Banking businesses
  • Insurance businesses
  • Investment fund management businesses
  • Lease-finance businesses
  • Headquarter businesses
  • Shipping businesses
  • Holding company businesses
  • Intellectual property businesses
  • Distribution and service centre businesses

What Does it Mean to be Subject to the Regulations?

Each Licensee that undertakes any of the Relevant Activities is required to submit a declaration to the relevant regulatory authority. This submission is mandatory, and it must be completed by December 31, 2020, for companies that have a financial year ending on December 31, 2019.

In addition, for every financial period, any Licensee engaging one or more of the activities involved will have to complete an Economic Substance Test. Performance of the Economic Substance Test will demonstrate that:

  • the Licensee and Relevant Activity are being directed and managed from the UAE;
  • the appropriate Core Income Generating Activities (“CIGAs”) are undertaken in the UAE; and
  • the Licensee has appropriate employees, facilities, and annual expenses in the UAE.

In accordance with set regulations, it is also requisite that any Licensee generating profits from a Relevant Activity in the UAE submit an economic substance report within 12 months from the end of the specific financial period.

The exception refers to companies regulated under the Federal or an Emirate government or a government agency or authority located in the UAE, directly or indirectly owned at least 51% by such authorities or bodies. Depending on the type of relevant action and the location where it takes place, the relevant regulatory authority may vary.

UAE organizations that engage in a Relevant Activity shall present to their Regulatory Authority an annual notice indicating whether they undertake a Relevant Activity in the preceding financial year and whether any revenue from a Relevant Activity has been subject to income tax outside the UAE.

Nevertheless, UAE organizations that qualify for an exemption to the regulations, or which over a financial cycle have not received revenue from the related operation, will have to apply for a declaration.

More Reporting Requirements

UAE organizations carrying on a related operation and receiving income from a Relevant Activity shall also request an annual report on the financial substance and determine whether they meet the criteria for the economic substance.

An entity will need to provide details on income for the activity concerned, number and qualifications of the employees engaged and on the facilities, as well as other properties on which they function.

Any entity that is part of a foreign multinational group is likely to have new responsibilities under the regulations. However, any Headquarter, Service centre or “high-risk” intellectual property business would only be subject to the Economic Substance Test if they transact with foreign group companies.

There are other nuances to the UAE Economic Substance Test for members of a foreign multinational group and we would be glad to help you learn more about how to navigate these regulations.

Are Board Meetings in the UAE Involved?

A Licensee carrying out a Relevant Activity during a financial period needs to meet the Economic Substance Test. For that reason, a sufficient number of board meetings are important. The scope and extent of the Relevant Activity being conducted by the Licensee will decide the adequate number of board meetings.

To be brief, board meetings, as well as the physical presence of the directors in the UAE will be required under the Economic Substance Test. If desired, some of these CIGA requirements can be delegated to third parties of the Licensee’s choosing, if the following requirements are met:

  • (i) the Licensee monitors and retains the ability to control the outsourced activities, and
  • (ii) the outsourced activities are performed in the UAE.

In essence, this shows that a Licensee can use UAE based employees and physical assets (inclusive of physical premises) of third parties or related entities to comply with the regulation set forth under the Economic Substance Test.

However, a Licensee is not allowed to outsource any requirements that the entity be “directed and managed”, because the Licensee must show oversight of its Relevant Activity in the UAE.

We would be happy to help you decide on the best way to comply with these new regulations and are happy to put our extensive network of contacts in the UAE to work on your behalf. Shanda Consult can help your company or operation find the best compliance solutions, so your company’s activities in the UAE can continue unimpeded.

What Steps Should be considered to Ensure Compliance?

A non-exclusive list of affairs has been issued by the UAE Ministry of Finance. All entities licensed onshore (Mainland) or in a free zone should analyse and be prepared to take action before the end of the financial term.

Licensees need to consider whether their activities undertaken throughout the financial term fall within the scope of Relevant Activities. If relevant, be ready to submit a substance form notification to respective regulatory authority on time.

Shanda Consult has a track record of creating optimal corporate structures in the UAE and ensuring total compliance with regulations. We are here to help you and your company with the UAE Economic Substance Test and finding the best way to ensure your continued prosperity in the UAE.

Please feel free to contact us through below contact form for a first complementary personal consultation via phone or, preferably, via zoom video conference it’s free!