UAE Economic Substance Regulations

As part of the UAE’s commitment to the OECD Inclusive Framework and in response to the European Union (“EU”) Code of Conduct Group’s assessment of the UAE’s tax framework, the UAE introduced Cabinet of Ministers Resolution No.31 of 2019 on Economic Substance Regulations on 30 April 2019.

Further guidance clarifying the application of these regulations was issued on 11 September 2019. The regulations mandate UAE onshore and free zone companies, as well as other business entities conducting any of the “Relevant Activities” listed below, to maintain an adequate economic presence in the UAE relative to their activities.

Who Must Comply with UAE Economic Substance Regulations?

The regulations apply to various onshore and free zone companies, including licensees that are part of foreign multinational groups, engaged in the following activities:

  • Banking businesses
  • Insurance businesses
  • Investment fund management businesses
  • Lease-finance businesses
  • Headquarter businesses
  • Shipping businesses
  • Holding company businesses
  • Intellectual property businesses
  • Distribution and service center businesses

Effective Date of UAE Economic Substance Regulations

Cabinet of Ministers Resolution No.31 of 2019 came into effect on 1st January 2019. Licensees must submit the required declarations within 12 months from the end of their respective financial year.

Who is Exempt from UAE Economic Substance Regulations?

Two types of entities are exempt:

  1. Companies directly owned by the Government of the UAE or any Emirate, or any governmental authority or body.
  2. Companies with at least 51% direct or indirect government ownership.

 

Immediate Steps for Licensee Companies and Branches

Licensees must take the following steps to ensure compliance:

  • Determine whether they fall under the scope of the UAE Economic Substance Regulations based on their activities.
  • If applicable, file the required notifications as per regulatory guidelines.
  • Evaluate income earned from the Relevant Activity during the financial period.
  • Hold and document board meetings in the UAE to meet the economic substance test.
  • Identify UAE-based expenses, assets, and premises related to the Relevant Activity and ensure demonstrable compliance.
  • Maintain an adequate number of full-time employees in the UAE with appropriate qualifications to carry out the Relevant Activity.
  • Ensure demonstrable control or supervision over any outsourcing arrangements.

Understanding the Economic Substance Test

To meet the Economic Substance Test, a licensee must demonstrate that:

  • The Licensee and Relevant Activity are being managed and directed in the UAE.
  • The Core Income Generating Activities (CIGAs) are conducted within the UAE.
  • The Licensee has sufficient employees, physical assets, and expenditures in the UAE.

For further details on appropriate compliance measures, refer to regulatory guidelines.

How Can We Assist You?

If you are a licensee seeking clarity on the UAE Economic Substance Regulations, our experts are here to help. Contact us for professional guidance and compliance support.