Economic Substance Regulation in the UAE
As part of the United Arab Emirates (“UAE”) commitment as a member of the Organization for Economic Cooperation and Development (OECD) inclusive framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE introduced a Resolution on the Economic Substance (“ES”) (Cabinet of Ministers Resolution No.31 of 2019, with effect from 30 April 2019. (“Resolution”).
Such Resolution obliges the companies “Licensee”, carrying out certain activities (“Relevant Activity”) that achieve Economic Substance interest to undertake a test on an annual basis.
The Resolution detailed the state the Relevant Activity, as the following:
Investment fund management business:
- Taking decision on the holding and selling of investments;
- Calculating risk and reserves;
- Taking decision on currency or interest fluctuations;
- Preparing reports to investors or any governmental authority.
Holding company business: the business of providing any of the following services to one or more foreign person by the Licensee:
- The provision of senior management;
- The assumption or control of material risk for activities carried out by, or assets owned by, any foreign person; and
- The provision of substantive advice in connection with the assumption or control of risk.
- Raising funds & managing risk;
- Taking hedging positions;
- Providing loans, credit or other financial services to customers;
- Managing capital and preparing reports to investors or any governmental authority.
Finance and leasing business:
- Agreeing funding terms;
- Identifying and acquiring assets to be leased;
- Setting the terms and duration of any financing or leasing;
- Monitoring and revising any agreement;
- Managing any risk.
- Taking relevant management decisions;
- Incurring operating expenditures on behalf of group entities;
- Co-ordinating group activities.
- Predicting and calculating risk;
- Insuring and re-insuring against risk;
- Underwriting insurance and re-insurance.
Intellectual property business:
- Taking strategic decisions and managing the principal risks related to development and subsequent exploitation of the intangible asset generating income;
- Taking strategic decisions and managing the principal risks related to acquisition by third parties and subsequent exploitation and protection of intangible asset;
- Carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties.
- Managing crew;
- Overhauling and maintaining ships;
- Overseeing and tracking shipping;
- Determining what goods to order, place of delivery and overseeing voyages.
Distribution and service center business:
- Transporting and storing goods;
- Managing inventories;
- Taking orders;
- Providing consulting or other administrative services.
The following conditions must be fulfilled to achieve the required Economic Substance test:
- The Licensee conducts one of the previously mentioned activities;
- The Licensee is directed and managed in UAE in relation to that activity;
- Existence of an adequate assets or premises and adequate level of operating expenditure;
- Existence of an adequate number of qualified full-time employees who are physically present in UAE.
It was cleared that the Ministry of Finance shall issue a guidance on how the Economic Substance Test may be met and standards of adequacy.
Necessary information must be included in the report:
Any Licensee required to undertake the test shall submit a report within twelve months from the end of financial year including the following information:
- Type of the relevant activity;
- Amount and type of relevant income, expenses and assets;
- Place of business;
- Number of the full-time employees and their qualifications;
- A declaration to prove whether or not the Licensee met the Resolution requirements.
Finally, the Resolution have stipulated a penalty system within the range of AED 10,000 to AED 300,000, determined according to each case if a Licensee is not meeting the requirement of ES Regulations. The Licensee may also be struck-off. The Law also stipulates that the tax authorities may exchange information on the non-compliant UAE registered companies with the tax authorities in the State where their holding companies and UBO’s are residents.
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