Economic Substance Rules UAE
The introduction of Economic Substance Rules UAE to honor the UAE’s commitment as a member of the OECD Inclusive Framework on BEPS and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist).
The issuance of the Economic Substance Rules UAE on 30 April 2019 (the Regulations), and the subsequent release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019. The purpose of the Regulations is to ensure that UAE entities that undertake certain activities are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE.
IS YOUR BUSINESS COMPLIANT?
On 30th April 2019, the United Arab Emirates (UAE) issued the Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Rules UAE (the “New Law”).Economic Substance Rules UAE requires certain companies, including those incorporated in the UAE Mainland or Free Zones (the “licensees” or the “companies”), to demonstrate that they have effective substance in the country by satisfying an “Economic Substance Test” in relation to any income-generating “relevant activity”.
Relevant Activities:
Banking Business
Investment Fund management Business
Lease – Finance Business
Headquarters Business
Shipping Business
Holding Company Business
Intellectual property Business (“IP”)
Distribution and Service Centre Business
DemonstratingEconomic Substance Rules UAE:
The Economic Substance Test requires a Licensee to demonstrate that:
The Licensee and Relevant Activity are being directed and managed in the UAE;
The relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE;
All or any part of the company’s gross income in relation to a Relevant activity is subject to tax in a jurisdiction outside of the UAE and
The Licensee has adequate employees, premises and expenditure in the UAE.
Reporting period:
The Regulations shall apply to the financial years starting on or after 1st January, 2020.
Filing Requirements:
| 1. | Filing of notification | – | 31st March, 2020 |
| 2. | Filing of return | – | Within 12 months from the end of their financial year |
Exemption:
There is an exemption for entities in which the federal government, the government of any Emirate or any governmental authority or body has at least 51% direct or indirect ownership.
Who needs to notify and by when?
A Licensees that undertakes a Relevant Activity (irrespective of whether the Licensee qualifies for an exemption under the Regulations or has earned income from the Relevant Activity during the relevant financial period) need to submit a simple notification with its Regulatory Authority. Notifications for the financial period 2019 can be filed on or after 1 January 2020.
Who needs to file an economic substance return and by when?
Only Licensees that earn income from a Relevant Activity during the relevant financial period and that are not exempt from the Regulations are required to demonstrate Economic Substance Rules UAE and file an economic substance return. Economic substance returns must be filed within 12 months from the end of the relevant financial period.
What are the penalties for non-compliance?
Failure to Notify: AED 10k to 50k Failure to provide accurate or complete information:
- A penalty of AED 10k to 50k; and
- Deemed failure to demonstrate Economic Substance Rules UAE Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year: First failure
- A penalty of AED 10k to 50k; and
- Information exchange with the foreign competent authority of: (1) parent company, (2) ultimate parent company, and (3) ultimate beneficial owner. The second consecutive instance of failure
- Information exchange with the foreign competent authority of: (1) parent company, (2) ultimate parent company, and (3) ultimate beneficial owner; and
- A penalty of AED 100k to 300k; and
- Trade / commercial license could be: suspended, withdrawn, or not renewed.
