The UAE Cabinet issued the Cabinet of Ministers Resolution Number 31 of 2019 concerning economic substance regulations in the UAE (the "Regulations") on 30 April 2019. The Regulations require the UAE entities ("Relevant Entities") that carry out any of the activities listed as "Relevant Activities" in the Regulations to have demonstrable economic substance in the UAE from 30 April 2019.
The Regulations were introduced to honor the UAE's commitment as a member of the Organization for Economic Cooperation and Development Inclusive Framework on Base Erosion and Profit Shifting and in response to European Union's review of the UAE tax framework. The Regulations ensure that the Relevant Entities undertaking Relevant Activities are not being used to artificially inflate profits that are not in commensuration with the economic activity undertaken in the UAE. The objective of the Regulations is to determine the requirements and set out the standard to confirm that the Licensee carries out the activity in the State that achieves economic substance interest.
The Regulations came into force on 30 April 2019, guidance on the Regulations was issued on 11 September 2019, the Regulatory Authorities were identified in a Ministerial Resolution issued on 4 September 2019 and amendments were made to the Regulations in Cabinet Decree Number 7 of 2020 issued on 19 January 2020 (the "2020 Regulations"). As per the 2020 Regulations the provisions of the Regulations do not apply to any commercial company, as defined in Article 8 of Federal Law Number 2 of 2015 concerning Commercial Companies, as amended, in which the Federal Government, the Government of any Emirate of the State, any Government Authority or entity affiliated to either of them owns directly or indirectly at least fifty-one percent (51%) of the share capital. The Regulations apply to a licensee carrying out Relevant Activities. Under the Regulations, "Relevant Activities" are:
- Banking
- Insurance
- Fund management
- Lease-finance
- Headquarters
- Shipping
- Holding company
- Intellectual property (IP)
- Distribution and Service Centre
The Relevant Entity must comply with the economic substance requirements by:
- Conducting the core income-generating activities in the UAE;
- Being "directed and managed" in the UAE; and
- Considering the level of activities performed in the UAE:
- Having an adequate number of qualified full-time employees in the UAE
- Incurring an adequate amount of operating expenditure in the UAE
- Having adequate physical assets in the UAE.
A Relevant Entity which only undertakes a Holding Company Business will be subject to less stringent economic substance requirements. However, if a Relevant Entity carries out high-risk IP related activities, additional requirements shall apply. It is mandatory that the economic substance requirements be met for each of the Relevant Activities in case a Relevant Entity is carrying out more than one Relevant Activity.
The Regulations permit an entity to outsource some or all of its activities to a third-party service provider. However, the service providers must in their own right have adequate presence in the UAE, and the entity must have adequate supervision of the outsourced activities. Support from service providers cannot be 'double-counted' if the services are provided to more than one Relevant Entity.
The Relevant Entity must report complete information regarding its Relevant Activities annually to the authority delegated pursuant to a resolution of the Cabinet of Ministers to regulate a Relevant Activity for the purposes of the Regulations ("Regulatory Authority").
Penalties for failure to comply with the Regulations:
- Failure to demonstrate sufficient economic substance in the UAE or to notify or to provide accurate or complete information or for the relevant Financial Year: AED10,000 - AED50,000.
- Failure to provide information exchange with the foreign competent authority concerning Parent company; Ultimate parent company; and Ultimate beneficial owner: AED10,000 - AED50,000.
- Failure to provide any of the above for the second Financial Year: AED100,000 - AED300,000; and the commercial license could be suspended, withdrawn, or not renewed.
Article 13 of the Regulations state the "Right of Appeal against Administrative Penalty". A Licensee upon whom a penalty is imposed by the Regulatory Authority may appeal against it on any of the following grounds (a) that liability to that penalty does not arise (b) Appeal against its amount.
The Regulatory Authority shall issue a resolution setting out the procedures for an appeal including the mechanism for filing an appeal and other procedures relating to the review and decision in relation to an appeal by the Regulatory Authority on receipt of an appeal and means for notifying its decisions to a Licensee.
The Regulations aid in bringing the UAE in line with other jurisdictions that have recently issued economic substance legislation (for instance Cayman Islands, Bermuda, Mauritius). The Regulations affirm the UAE's commitment to addressing concerns regarding the shifting of profits acquired from mobile business activities to "zero or nominal tax jurisdictions" without corresponding local economic activities.
Originally published 14 June 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
