Introduction of Economic Substance Regulations in UAE
Contributed by Aurion
15 November, 2019
UAE is removed from the European Union (EU) blacklist and all thanks to the introduction of Economic Substance Regulations.
The United Arab Emirates (UAE) was removed from the European Union's blacklist by the Code of Conduct Group on Business Taxation on October 10, 2019.
UAE had introduced the Economic Substance Regulations under the specific guidance issued by the Ministry of Finance.
The Economic Substance Regulations introduces additional compliance and substance requirements for certain UAE entities in doing business in the region. The new regulations have enhanced the confidence of international investors and financial institutions.
UAE is transforming itself as a global financial hub and also is committed to the international standards set by the OECD and the European Union (EU).
The move of introducing the Economic Substance Regulation by UAE has initiated the removal of the UAE from the EU's tax blacklist.
Even other Offshore jurisdictions like Cayman Islands, BVI, Bahrain, etc., also have become compliant with the Economic Substance Legislation.
Economic Substance (ES) Regulations and Guidance
The Economic Substance (ES) Regulations highlight the regular recording and reporting of all the economic activities undertaken by UAE entities, including companies, branches and rep offices (including those based in any of the UAE's Free Zones)
Companies performing the following business activities (relevant Activities) have to be compliant with the ES regulatory requirements from now.
- Fund Administration
- Finance and Leasing
- Holding Company Business
- Intellectual property business
- Distribution centers
Corporates conducting activities that are not mentioned in the above list are not subjected to the ES requirements.
However, all Corporates in the UAE will now require to provide business information to the regulatory authorities when required whether or not they perform any relevant activities.
Who is Subject to the Economic Substance Regulations?
All business entities in UAE from 2020 have to provide the ES Regulatory Authority with the notification of the following:
- Whether they conduct any of the relevant activities in the UAE
- Whether part of their income is taxable outside UAE
- Core business income generation in the UAE and the required information specified by ES regulatory authority.
The companies have to submit an Economic Substance Report (ES Report) to the Regulatory Authority.
- The ES Report provides specific information in relation to its compliance with the Economic Substance Test (ES tests)
- Penalties and potential exchange of information (EOI) may apply as a result of non-compliance with the ES regulations.
What are the Economic Substance Requirements?
The entities performing relevant activities in the UAE must meet the following test:
- Conduct core income-generating activities within the UAE
- Have directors and management in the UAE
- Have an adequate number of qualified staff to perform activities physically present in the UAE
- Incur an adequate level of operating expense in the UAE
- Have adequate physical asset in the UAE
Impact for the Corporate Entities based in UAE
For UAE headquartered corporates and Foreign Multinational Companies that undertake genuine business activities within the UAE, the new legislation will have a limited impact.
However, there will be more reporting standards to comply with the ES regulations.
Corporates who have operations (and conduct Relevant Activities) within the UAE that are managed from outside the UAE should closely review their governance structures.
Business entities must ensure that financial management is conducted in accordance with ES requirements.
Also, for Corporates with relevant activities in the UAE and have never developed the appropriate level of reporting standards or physical & economic presence, they have to take action and necessary caution to not default the ES regulations.
How will UAE benefit from the Economic Substance Regulations?
UAE is becoming a full complaint international player with the global tax community. The new regulations are in line with UAE's membership of OCED BEPS (Base Erosion & Profit Shifting) inclusive framework.
Base erosion and profit shifting (BEPS) refers to tax planning strategies that multinational companies leverage for tax savings.
BEPS practice costs countries a significant loss in revenue annually. The OECD Framework on BEPS is a collaboration of over 130 countries to implement measures to tackle tax avoidance and improve the international tax rules and ensure a more transparent tax environment.
UAE is always a lucrative place for business investors due to the availability of labor, technology, and bandwidth to accommodate more international companies.
The new developments will help driving more foreign investment and enhance the image of the UAE as a major business center of the Middle East.
Contact: Aurion Business Consultants
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