Starting from 2019, all UAE entities conducting “relevant activities” (explained further) will be obliged to meet certain legal requirements. These are “economic substance regulations” requiring the UAE companies to demonstrate actual economic activities - the type and level of activity they undertake. Further, businesses carrying out “relevant activities” will have to produce the reports to the Regulatory Authority annually to demonstrate that the company achieves economic substance interest.

Scope

The provisions of the regulations apply to entities carrying out any “relevant activity” in the United Arab Emirates. “Relevant activities” include:

• Banking Business

• Insurance Business

• Investment Fund Management Business

• Lease-Finance Business

• Headquarters Business

• Shipping Business

• Holding Company Business

• Intellectual Property Business

• Distribution & Service Centre Business

Requirements to meet Economic Substance Test

In order to meet the requirements, the entity must satisfy all of the following criteria:

• The company conducts the State Core Income-Generating Activities (relevant activities associated with the income generated) in the UAE

• Management and decision making in relation to that activity situated in the UAE

• An adequate number of qualified full-time employees who are physically present in the UAE/adequate level of expenditure on outsourcing present in the UAE

• Adequate operating expenses incurred within the UAE

• Adequate physical assets within the UAE

• Control over the relevant activities outsourced

*It worth noting that entities undertaking intellectual property activities and those companies that outsource their activities will be subjected to increased scrutiny.

Requirement to report

The companies undertaking relevant activities are required to notify the Regulatory Authority of:

• Whether the company is carrying out the relevant activity or not

• All or any party of gross income from the relevant activity is subject to tax in other jurisdiction

• The date of financial year ending.

Moreover, entities must submit annual reports to the Regulatory Authority. These reports must be provided within 12 months of the end of each financial year and contain information on the type of activities, income, operating expenses and assets, place of business, personnel. Companies conducting “high-risk” intellectual property business will be subject to additional requirements.

Sanctions in case of non-compliance

Obviously, failure to meet the requirements will lead to unpleasant consequences. The following fines are envisaged for non-compliance:

• Failure to meet the Economic Substance Test (first time) – AED 10,000 to AED 50,000

• Failure to meet the Economic Substance Test (subsequent time) – AED 50,000 to AED 300,000

• Failure to provide information or providing inaccurate information – AED 10,000 to AED 50,000

Non-compliance may also result in other penalties such as revocation, suspension or non-renewal of a license. Besides, the UAE authorities may exchange information about non-compliant companies. Such information may be shared with the tax authorities and the states where ultimate beneficial owners or parent companies reside. Ultimately, it is up to the Regulatory Authority to decide on penalties imposed on a company.

Why regulations?

In 2019, the United Arab Emirates were removed from the European Union blacklist of non-cooperative jurisdictions. The Economic Substance Regulations have been passed to implement the commitments to improve the tax policy framework. The implementation of such measures is necessary to prove that the UAE is a compliant, cooperative and reputable jurisdiction in the international landscape.