The Ruler of Dubai issued the Resolution of the Cabinet of Ministers No. 31 for 2019 concerning economic substance rules on 20 June 2019. The legislation, which entered into force as of 30 April, is intended to secure the UAE’s removal from the European Union’s blacklist of uncooperative jurisdictions.
The blacklisting was announced in March, after the EU’s Code of Conduct Group (Business Taxation) named the UAE as one of the jurisdictions it considered to be facilitating offshore structures or arrangements aimed at attracting overseas profits that do not reflect real economic activity in the jurisdiction.
The economic substance regulations apply to companies engaged in core income generating activities (CIGA) including banking, insurance, fund management, financing and leasing, headquarter companies, shipping business, investment holding, IP activities and distribution and service centres.
To meet the economic substance requirement, companies will generally need to satisfy the following three tests:
- The company should be directed and managed in the UAE for the specific activity;
- The company’s CIGA should be performed in the UAE;
- The company should have an adequate level of qualified employees, premises and annual operating expenditures.
Relevant companies should ensure that their boards have frequent quorate meetings in the UAE, that are minuted and signed by all attendees, and all the records should be kept within the UAE. For legal entities such as branches, representative offices and other companies who are managed by a single director, that manager must be physically present in the UAE when making the main decisions.
Entities may outsource CIGA activities – with the exception of ‘high risk’ IP – provided the outsourced activities are carried out inside the UAE and the entity retains full control over those activities. In line with the EU recommendations, pure holding companies will be subject to less stringent substance requirements. Additional reporting requirements apply to ‘high-risk’ IP companies.
Entities carrying on relevant activities that fall within the scope of the regulations are required to prepare a report to the regulatory authority, demonstrating that they satisfy the economic substance test, no later than 12 months after the end of each financial year. The regulatory authority will then submit the report to the competent authority, the UAE Ministry of Finance.
Fines of up to AED50,000 will be imposed for late reporting. Fines of up to AED300,000 and possible licence suspension, deregistration or even compulsory liquidation will apply for failure to meet the mandatory substance requirements.
“The purpose of this new legislation is to ensure that a strong economic base is maintained in the Middle East and that economic corporate entities report their profits and pay the required taxes where these profits are generated. This new guidance provides a clear, firm, and specific framework including advice on how economic substance should be analysed by companies operating in the UAE,” said Simon Gordon, Director and Head of Sales & Strategy at Sovereign Corporate Services in Dubai.
“It is expected that further executive regulations will be issued to provide more clarifications with respect to the provisions of the new economic substance regulations, including implementation details. Sovereign’s team of consultants will be able to assist clients in determining the most suitable and robust structures to meet their requirements.”
For further information, contact Simon Gordon.