Transparency has been high on government agendas since the global financial crisis and this has resulted in the introduction of a number of tax transparency and anti-avoidance measures across the world.
The adoption of the OECD’s Common Reporting Standard (CRS) introduced automatic exchange of tax and financial information on a global level. This was a game-changer, providing for the international exchange of account holder information and introducing a new level of transparency.
The OECD then turned its attention to combatting Base Erosion and Profit Shifting (BEPS) – multinational enterprises exploiting gaps and mismatches between different countries’ tax systems to ‘shift’ profits from higher-tax jurisdictions to lower-tax jurisdictions and thereby ‘eroding’ the tax bases of higher-tax jurisdictions.
In April 2019, the UAE introduced Economic Substance Regulations (ESR) to respond to Action 5 of the OECD’s BEPS project. The regulations require companies registered in the UAE that carry on a ‘Relevant Activity’ to have economic substance in the UAE in relation to these activities, and to comply with notification and return filing obligations.
On 15 April 2020, the Ministry of Finance published a ‘Relevant Activity Guide’ on its website* to provide further clarity on the scope of those companies impacted, together with additional comments relating to Core Income Generating Activities (CIGA) and useful examples.
For instance, the CIGA in relation to a ‘Distribution and Service Centre Business’ are listed as follows:
- Transporting and storing goods, components and materials/goods ready for sale
- Managing Inventories
- Taking orders
- Providing consulting or administrative services
- Practical example – The main business activity of TUV LLC (a company established in the Ajman Free Zone) is to provide HR and administrative support services to a group company based in Kuwait, which are recharged at cost. Despite TUV LLV not charging a mark-up on the relevant costs, TUV LLC is considered as engaged in a Distribution and Service Centre Business.
The initial notification deadline was 31 March 2020, but certain Regulatory Authorities have extended this as follows:
| Free Zone | New Deadline | Additional Information |
| Abu Dhabi Global Market (ADGM) | 30th June 2020 | Email economicsubstance@adgm.com |
| Dubai International Financial Centre (DIFC) | 12th June 2020 | Via DIFC Portal |
| Dubai Multi Commodities Centre (DMCC) | 30th June 2020 | Via DMCC Portal |
| Dubai Airport Freezone Authority (DAFZA) | 31st May 2020 | Via DAFZA Portal |
| Dubai Silicon Oasis Authority (DSO) | 31st March 2020 | Guidance on filing process available |
| Ras Al Khaimah International Corporate Centre (RAKICC) | 30th June 2020 | Registered Agent can submit via RAKICC Portal |
| Ras Al Khaimah Free Zone (RAKEZ) | 30th June 2020 | Via RAK EZ Portal |
| Dubai World Trade Center (DWTC) | 30th June 2020 | Email: info@dwtcauthority.com |
Failure to notify the Regulatory Authority will result in incurred penalties of up to AED50,000. There are further penalties if companies conducting ‘Relevant Activities’ fail to demonstrate adequate economic substance in the UAE.
Additionally, the COVID pandemic has greatly impacted travel and could have a knock-on effect for ESR reporting. Professional advice may be required in the following cases:
- Board meetings – companies need to document their situation carefully if board meetings need to be held during the lockdown timeframe
- Companies with a legal presence in jurisdictions such as British Virgin Islands and the Cayman Islands – ‘tax havens’ that have recently introduced ESRs – will need to consider the impact of travel restrictions on fulfilling the relevant requirements in these jurisdictions.
Sovereign can provide reliable, professional advice on these matters. We have significant experience in gathering and reporting company data and are helping our clients understand and respond to the new legislation. Please contact me for further information.
