Complying with the new UAE Economic Substance Regulations
In March 2019, the European Union (EU) published an updated blacklist of non-cooperative tax jurisdictions, which included the UAE for not delivering on its commitment to comply with the EU’s good governance criteria.
Since then the UAE has issued new legislation under Cabinet Resolution No. 31 of 2019 which specifies the requirements for companies to have economic substance and an actual presence in the UAE. Although the Resolution was published on 19 June 2019, compliance with the requirements has been in force since 30 April 2019. The anticipated removal of the UAE from the EU’s blacklist will be welcomed by international investors and financial institutions alike.
The key impact of the Resolution is the obligation of companies carrying out Relevant Activities to meet the specified economic substance requirements and to conduct annual compliance reporting.
Who does the Resolution apply to?
Under the Resolution, the economic substance requirements apply to companies that generate income by carrying out the following Relevant Activities in the UAE, whether onshore or in the Free Zones, including the Financial Free Zones:
- Insurance services;
- Investment fund management;
- Finance leasing;
- Headquarter activities related to (i) conducting management decisions; (ii) incurring operational expenditures on behalf of group entities; and (iii) coordinating group activities;
- Intellectual property services;
- Holding company activities; and
- Distribution and service centre activities.
The Key Obligations of a Business in the UAE
To have economic substance and hold a trade licence in the UAE, either onshore or in a Free Zone, the key obligations imposed on UAE companies under the Regulations are as follows:
- The company must conduct its core income-generating activities in the UAE;
- The company must be managed and directed within the UAE in relation to the its business activity – i.e. it must hold board meetings and AGMs, with a quorum of directors physically present and signing in the UAE;
- It must have an adequate number of full-time employees, incur expenses and have physical assets for carrying out the relevant business activities in the UAE; and
- It must demonstrate that it controls the execution of activities which have been outsourced to third parties.
Companies carrying out relevant changes, must submit an Economic Substance Report annually. The Company has an annual obligation to prepare and submit to the Regulatory Authority a detailed report to evidence that the Company satisfies the economic substance requirements. The Report should include:
- The value and type of revenue related to the relevant activities;
- The location of the activities and the property and/or equipment used to conduct the activities;
- The number of employees, their qualifications and the number of people responsible for conducting the activities; and
- A disclosure stating that the company has met the economic substance requirements.
The relevant Regulatory Authority where the Reports are to be submitted will be clarified by a further Cabinet resolution.
For entities such as Foreign Branches and Representative Offices which do not have a board and whose management is carried out by a single manager, that manager must be physically present in the UAE when making the main decisions concerning administration and operation of that entity.
Holding companies will have less extensive requirements and will satisfy the requirements if they submit their relevant information to the competent authority, and if they have sufficient staff and premises to carry out the work of a holding company.
The legislation states that further guidance will be issued to assist companies in meeting the economic substance requirements.
What if a Business in the UAE Does Not Comply with the Regulations?
Companies in the UAE carrying out Relevant Activities must file their first Report within 12 months from the end of their fiscal year. Thereafter, there will be an annual reporting requirement. As the rules came in on 30 April 2019, the first Reports for existing companies should be done in 2020.
Non-compliant companies could risk fines and penalties, suspension, withdrawal or non-renewal of licences, and the disclosure of their position to other foreign authorities.
If the company does not comply with the Regulations, they will face the following:
- If the Report indicates non-compliance with the Regulations, the UAE Ministry of Finance shall disclose information of the Company to the foreign authorities in the country in which the parent company and/or the ultimate beneficial owner of the Company is resident.
- If the Company does not comply it will face the following financial penalties:
a. If a Company fails to meet the Economic Substance Test for one financial year, a penalty of between AED10,000 and AED50,000 can be imposed by the Regulatory Authority. Repeated failure to meet the Economic Substance Test may lead to penalties of up to AED300,000; and
b. Companies who fail to provide information or provide inaccurate information may be subject to an administrative penalty of between AED10,000 and AED50,000.
3. Non-compliance may eventually also result in commercial licence suspension, withdrawal or non-renewal.
It is important for UAE Companies – both in the mainland and Free Zones – to understand the economic substance requirements and the obligation to annually prepare the Report and file it with the Relevant Authority.
Outsourcing to Third Party Service Providers
The legislation does envisage that corporate entities may appoint a third party to fulfil some or all their economic substance requirements, but in doing so the corporate entity must be able to show it has full control over the activity designated to the third party.
For many UAE headquartered companies and foreign multinationals that undertake genuine business activities within the UAE, the new legislation will have a limited impact, save for imposing additional reporting requirements for which they should await supplementary guidance with regards to the form, content and timing of reporting.
Companies who conduct Relevant Activities within the UAE but which are managed from outside of the UAE should ensure that management is conducted in accordance with the requirements of the legislation. Companies without sufficient operations and management in the UAE to meet the new standards of economic substance should consider conducting core activities within the UAE whilst moving operating assets and expenses into the UAE to ensure compliance.
It is vital to assess your existing level of economic substance in the UAE and how you can start to comply with the new Regulations. The key areas of your operation that the Regulations may impact concern corporate structuring and tax aspects.
How can PRO Partner Group help?
PRO Partner Group is the leading company formation support specialist in Abu Dhabi and Dubai. We specialise in setting up and supporting foreign businesses in the UAE providing secure Local Partner, National Agent and PRO services – establishing companies and assisting in managing their staffing, visas and back office needs and operations.
PRO Partner Group can assist to ensure that your AGM and annual corporate governance and compliance requirements are in place and further advise on the economic substance guidelines and reporting as they become clearer.
For more information please contact a member of the team on firstname.lastname@example.org; telephone our Abu Dhabi office on +971 (0)2 448 5120 or our Dubai on +971 (0)4 456 1761. Alternatively, you can me directly at email@example.com or on +971 (0)56 991 1278.