Further to our alert of 25 June 2019 on the economic substance regulations, which came into effect on 30 April 2019 pursuant to the Cabinet of Ministers Resolution No. 31 of 2019 (“Regulations”), and in light of the approaching enactment of the Ministry of Finance guidelines to the Regulations, it is important for businesses operating in the UAE to:

• consider the impact of the Regulations on their operations; and
• ensure compliance with the Regulations before they are required to prove such compliance to authorities.

Notification and Economic Substance Report

The Regulations require entities holding a trade license in the UAE onshore or in a free zone to:

1. notify the Regulatory Authority (to be determined by a Cabinet Ministers’ resolution) on an annual basis as to whether they are carrying on a “relevant activity”; whether any income is subject to tax outside the UAE; and the date of the financial year end; and
2. submit an annual report to the Regulatory Authority (each year) if it they are carrying on a “relevant activity” providing details related to the activity, income, expenses and assets and declaring whether the economic substance test is met. The report must be submitted within 12 months of the end of each financial year.

The report will need to be submitted:

1. for financial years commencing on or after 1 January 2019. Therefore, for entities with a financial year ending on 31 December 2019, the first report will be required to be submitted by 31 December 2020;
2. by each UAE entity individually, rather than under one submission, even if a business has a number of entities registered in the UAE.

Failure to Comply

A number of significant sanctions may be imposed by the authorities against a business that fails to comply with the Regulations framework, e.g.:

• A fine of AED 50,000, for failure to meet the economic substance test or to provide information;
• A fine of up to AED 300,000, suspension, revocation or non-renewal of the license for a repeated failure to meet the economic substance test; and/ or
• disclosure by the Ministry of Finance, to foreign authorities in the country where the entity is incorporated or in which the parent company, ultimate parent or ultimate beneficial owner are resident, of information of the UAE entity concerning its lack of the economic substance in the UAE.

What Should You Do Now?

Since we understand that UAE businesses will be required to advise the Relevant Authority of their economic substance in respect of their financial year commencing on or after 1 January 2019 and will need to file the report within 12 months of the end of the financial year, you should:

• assess if the Regulations apply to your UAE entities;
• verify if the entity complies with the Regulations and, if they do not comply;
• take steps to remedy the incompliance so that you are aligned line with the Regulations by the time you submit the report with the Relevant Authority.

How can we help?

As the largest law firm in the Middle East and with our strong corporate structuring and tax expertise and experience across all industry sectors in the Middle East, Al Tamimi & Company’s experts will be delighted to assist you as follows:

(a) Assessment

• Review whether or not your UAE entities are subject to the Regulations;
• If they are subject, assess if your UAE operations across all emirates, onshore/ free zones, are currently expected to meet the requirements for economic substance under the Regulations; and
• Recommend solutions to remedy potential incompliance, in order for you to comply with the Regulations.

(a) Implementation

• Assist in implementing the recommended solutions to comply with the Regulations.

(b) Ongoing Compliance

• Prepare the notification and the report for submission with the Regulatory Authority.

Please do not hesitate to contact Al Tamimi’s Corporate Structuring Team and Tax Team if you require any assistance.

Click here to follow Al Tamimi’s Tax Team’s LinkedIn page for more updates on tax developments in the Middle East.

Key Contacts:

Izabella Szadkowska
Partner, Corporate Structuring
i.szadkowska@tamimi.com

Shiraz Khan
Head of Taxation, Tax
s.khan@tamimi.com