UAE Economic Substance Regulations

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

Guidance that provides further clarity on the application of the Regulations was issued on 11 September 2019. The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.

UAE Economic Substance Regulations are applicable to?

These regulations are applicable for various onshore and free zone companies, and licensees including licensees belong to foreign multinational groups, which perform the below listed relevant 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

UAE Economic Substance Regulations are applicable from?

This Cabinet of Ministers Resolution No.31 of 2019 will become effective as of 1 st January 2019. And the respective declarations should be submitted within a period of 12 months from the end of the respective financial year.

Who are Exempted from UAE Economic Substance Regulations?

Two types of companies are exempted:

  1. Companies directly under the Government of the State or Government of any UAE emirate or any governmental authority or body.
  2. Companies with a minimum 51% direct or indirect ownership shareholding.

What are the Immediate Steps to be Taken as a Licensee Company or Branch?

They have to ensure that the following things are taken care of:

  1. Assess whether you fall under the UAE Economic Substance rules within the scope of any Relevant Activities
  2. If they fall under the Economic Substance Regulations in UAE, the companies need to file notifications in the required format as instructed by the regulatory body.
  3. Assess the income earned from the Relevant Activity during the specific financial period.
  4. Hold board meetings by directors in order to meet the economic substance test. It should be signed in the UAE itself.
  5. Then you need to identify the expenses and UAE based assets (plus premises) associated with the Relevant Activity. And make sure that they can be demonstrated.
  6. Obtain the number of full-time employees and other personnel along with the info of their qualifications. They should be based in the UAE and responsible for carrying out Relevant Activity.
  7. Make sure that any action- control or supervision over the outsourcing arrangements can be demonstrated.

What is the Economic Substance Test?

In an Economic Substance Test, Substance Licensee has to show that:

  • the Licensee and the Relevant Activity are being directed and managed in the UAE
  • the relevant Core Income Generating Activities (“CIGAs”) is being conducted in the UAE
  • the Licensee has an adequate number of employees and adequate physical assets and expenditure in the UAE.

You can check out the detailed Info of Appropriate actions to be taken for the UAE Economic Substance Regulations here.

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