On 30 April 2019 the United Arab Emirates (UAE) approved Resolution No. 31 introducing into the tax legislation the provisions on economic substance (Economic Substance Regulations) of activities based in the UAE.
The Regulation
This legislation applies to all individuals and legal entities, holders of a licence issued by one of the relevant UAE authorities, who obtain their income from carrying out one or more relevant activities in one or more of the following areas: banking, insurance, fund management, shipping, lease-finance, distribution and service centres, headquarters and/or investment holding companies, exploitation of intellectual property. The term licence includes a business licence, a certificate of incorporation and any type of permit required to start a business activity in the UAE. The Minister of Finance subsequently published the Guidelines with Ministerial Decree No. 215 of 11.09.2019, containing several clarifications concerning the legislation on economic substance requirements. Entities directly or indirectly controlled (at least 51% of the share capital) by the government and activities subject to government authority are expressly excluded from the scope of this law.
Compliance requirements
In order to comply with ESR legislation, companies will have to meet three types of requirements:
- to have the direction and management of the company in the UAE: this requirement is considered satisfied when at least one Board of Directors is held in the UAE during the financial year, drawing up written minutes, signed by every director present and keeping
them in the UAE. If the company is represented by an individual, the same requirements will apply;
- to carry out its main economic activity in the UAE;
- have an adequate and appropriate operating structure (qualified personnel, offices, operating expenses): the Guidelines did not want to impose numerical parameters in terms of employees and structure operating costs, specifying that the terms “adequate” and “appropriate” depend on the nature and level of the activity carried out. However, the company will have to retain (for a period of six years) appropriate accounting instruments to demonstrate the adequacy of the resources used and the expenses incurred.
The Guidelines confirmed that any expenses charged by an external provider, located in the UAE, for activities carried out in favour of the company can also be considered in determining the concept of “adequacy” of corporate resources and have also introduced specific clarifications for the following types:
- companies whose activities are limited to holding shares in other companies, receiving only capital income from them (dividends or capital gains), must meet reduced economic substance requirements;
- companies receiving income from intellectual property exploitation are considered to be at high risk and are therefore subject to additional reporting obligations;
- a company may be considered the parent company based on its activities and the services provided and not by its position within the Group organization chart.
Compliance obligations
Interested parties should notify the relevant authority if they are performing a relevant activity for the purposes of the Economic Substance Regulations, specifying whether the profit of that activity is subject to taxes in other foreign jurisdictions and the company’s financial year end. They shall submit annually, within 12 months from the last day of the tax period following 1 January 2019, a report to the competent authority indicating the type of activity carried out, the amount and type of income, operating expenses and information on personnel.
Failure to comply with the requirements of economic substance and/or the submission of reports provided by a company may result in increasing administrative fines over time (up to a maximum of AED 300’000) and the potential cancellation from the Commercial Register.
The introduction by the UAE of the regulation of 30 April 2019 on economic substance, which originates from the decision of the UAE of 16 May 2018 to join the Inclusive Framework on Beps promoted by the OECD, allowed the United Arab Emirates to be deleted from the EU List on non-cooperative jurisdictions (black list) on 10 October 2019.
To know more
This article, published by Fabrizio Ghidini, has first appeared on Fidinam & Partner's Newsletter - February edition. The Fidinam & Partners Newsletter contains all relevant news on domestic and international taxation. To receive the Fidinam & Partners Newsletter by e-mail, please complete the form below.
