UAE Introduces Economic Substance Regulations

Pursuant to the Cabinet of Ministers Resolution No. 31 of 2019, the UAE has introduced economic substance regulations (“Regulations”) which set out the requirements for entities to have an actual economic presence in the UAE. The introduction of the Regulations follows the UAE’s commitment to comply with EU requirements in order to be removed from the EU’s list of non-cooperative tax jurisdictions (“EU Tax Blacklist”) .

The Regulations came into effect on 30 April 2019.

Key Obligations of a UAE Business

The key obligations imposed on UAE companies under the Regulations are as follows:

1. Have Economic Substance: An entity holding a trade license in the UAE onshore or in a free zone (“Licensee”) must, in particular:
   1. conduct “core income-generating activities” in the UAE;
   2. be managed and directed in the UAE in relation to the its business activity, e.g., hold board meetings, with a quorum of directors physically present, in the UAE; and
   3. have an adequate number of full time employees, expenses and physical assets for carrying out the business activity, in the UAE.
2. Submit Economic Substance Report: The Licensee has an annual obligation to prepare and submit to the Regulatory Authority (to be determined by a Cabinet of Ministers’ resolution) a report (“Report”) to evidence that the Licensee satisfies the economic substance requirements. The Report should include: (i) information on the Licensee’s relevant activities (such as the nature and amount of revenue, expenses, place of business, and number of employees with qualifications); and (ii) a declaration on the satisfaction of the economic substance requirements.

What if a UAE Business Does Not Comply with the Regulations?

1. Foreign Authorities Disclosure: If the Economic Substance Report indicates non-compliance with the Regulations, the UAE Ministry of Finance shall disclose information of the Licensee to the foreign authorities in the country in which the parent company and/or the ultimate beneficial owner of the Licensee is resident.
2. Monetary Sanctions:

Failing to meet the Economic Substance Test:
Should a Licensee fail to meet the Economic Substance Test for a financial year, an administrative penalty of between AED 10,000 and AED 50,000 can be imposed by the Regulatory Authority. Repeated failure to meet the Economic Substance Test may lead to a penalty of up to AED 300,000.

Failing to provide information or providing inaccurate information:
Licensees who fail to provide information or provide inaccurate information under the Report may be subject to an administrative penalty of up to AED 50,000.

Issuance of Executive / Implementing Regulations

As the framework prescribed under the Regulations is of a high-level nature only, we expect:

• the Executive Regulations, setting out the detailed application of the Regulations, will be enacted in due course; and
• the Cabinet of Ministers or a delegated authority will issue decisions to implement any of the provisions under the Regulations.

What should you do next?

It is important for your UAE businesses to (i) understand the economic substance requirements and the obligation to annually prepare the Report and file it with the Relevant Authority; and (ii) undertake a “health check” on your existing level of economic substance in the UAE.

The key areas of your operation that the Regulations may impact concern corporate structuring and tax aspects.

How can we help?

As the largest law firm in the Middle East and with strong corporate structuring and tax expertise and significant corporate structuring and tax experience across all industry sectors in the Middle East, Al Tamimi & Company is well placed to assess the impact of the recently introduced Regulations on your organisation and assist you to comply with the new Regulations.

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