UAE relaxes foreign ownership restrictions and introduces substance requirements
The UAE Cabinet announced on 2 July that a Resolution had been passed approving the ‘positive list’ of 122 specific activities across 13 business sectors in the UAE that are now eligible for up to 100% foreign ownership.
The Cabinet issued the Foreign Direct Investment Law (Federal Decree Law No. 18) in September 2017, which provided a framework for the relaxation of the majority shareholder requirement in specific licensed activities and business sectors to be detailed in supplementary legislation.
Previously any company established outside a free zone in the UAE was required to have at least 51% of its share capital held by a UAE national shareholder.
Publication of the Cabinet Resolution is still awaited but the business sectors referred to in the official press release are as follows:
- Renewable energy
- Transport and Storage
- Hospitality and Food Services
- Information and Communications
- Professional, Scientific and Technical Services
- Administrative and Support Services
- Arts and Entertainment
When published, the Resolution will set out the activities – primarily focused on research, ecommerce, biotech and renewables – within these sectors. The individual Emirates will retain the ultimate authority to determine which activities are subject to liberalised foreign ownership.
The UAE Cabinet also published, on 4 July, Federal Cabinet Resolution No.31 of 2019 regarding the requirements for actual economic activities and Federal Cabinet Resolution No.32 of 2019 regarding the organisation of reports submitted by multinational companies. Both were originally issued on 30 April.
The new economic substance requirements are a result of work conducted by the OECD under Action 5 of the Base Erosion and Profit Shifting (BEPS) project, as well as an investigation by the European Union (EU) Code of Conduct Group (COCG) into certain low or no corporate income tax regimes.
In March, the European Union added the UAE to its blacklist of ‘non-cooperative’ tax jurisdictions that had failed to meet EU requirements on tax transparency and had not implemented commitments made to the EU by an agreed deadline.
Resolution No. 31 requires that UAE entities carrying on specific categories of licensed activities in the UAE should satisfy prescribed economic substance criteria and report annually on compliance.
The rules apply to companies engaged in ‘core income generating activities’ (CIGA) – 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.
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 shall be subject to less stringent substance requirements. Furthermore, additional reporting requirements apply to ‘high-risk’ IP companies.
All UAE companies – onshore and free zone companies – are required to file an annual notice stating whether they undertake relevant activities. Entities carrying on relevant activities that fall within the scope of the regulations need 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. Non-compliance will result in fines ranging from AED 10,000 to AED 50,000 for a first-time breach and between AED 50,000 to AED 300,000 thereafter.
Resolution No. 32 is focused on multinational groups of companies and requires that an entity established in the UAE that is a member of such a group must issue a detailed report of financial and other information if certain criteria are met.
A multinational group is one in which at least two of the companies are tax resident in different jurisdictions, or one entity has permanent establishments in at least one other jurisdiction, and that generates consolidated revenues of at least AED 3.15 billion per annum. Tax reports must be submitted within 12 months after the end of a multinational group’s financial year beginning on 1 January 2019.