Due to the UAE's favourable tax policies, which include no corporate and no personal income taxes, more and more businesses are moving there. But managing tax transparency presents a difficulty for the nation.
UAE Economic Substance Regulations were implemented in 2019 to remove the nation from the list of non-cooperative countries about this problem.
Overview of the UAE Economic Substance Regulations
The UAE Economic Substance Regulations (ESR) were introduced by the Cabinet of UAE Ministers through Resolution No. 31 on April 30, 2019. However, on August 10, 2020, Resolution No. 57 was issued to amend and replace the previous resolution.
The implementation of the ESR in the UAE was prompted by directives from the Organisation for Economic Cooperation and Development (OECD) Forum and the European Union Code of Conduct Group (EU COCG) to counter harmful tax practices.
The ESR establishes a set of rules to ensure that all business transactions are associated with genuine business purposes or business substance. This means that all UAE onshore, offshore, and free zone companies engaged in relevant activities must demonstrate that they generate actual profits in line with substantial economic presence in the jurisdiction.
The application's scope
The Economic Substance Regulations apply to specific commercial entity types, including "licensee." Additionally, the statute specifies some exemptions.
If: Your business qualifies as a "licensee."
It is a corporate legal entity with a separate legal personality from its owners or an unincorporated partnership.
It is registered in the UAE, including a Free Zone and a Financial Free Zone.
It engages in Relevant Activities.
In the event of a branch, under certain circumstances, your branches will fall within the purview of UAE Economic Substance Reporting obligations. Your company is specifically registered in the UAE, and the branches lack independent legal identities. In this situation, you must declare the Relevant Activities of your business and its branches.
Relevant Activities
If your company engages in any of the following operations, it must adhere to the UAE Economic Substance Regulations:
Banking business
Insurance business
Investment fund management business
Lease-finance business
Headquarter business
Shipping business
Holding company business
Intellectual property business
Distribution and service center business
The UAE government determines whether your business entity engages in a Relevant Activity using a "substance over form" strategy. Whether or not such action is covered under the business's commercial license or permit is irrelevant.
A licensee that engages in multiple Relevant Activities within the same fiscal year is required to provide evidence of financial viability for each activity. It is optional to comply with the reporting requirements for Economic Substance if it does not engage in any Relevant Activity during the relevant financial year.
Exemptions
The ES regulations are not imposed on the following licensees:
Licensees that are non-UAE tax residents
Investment funds and their underlying Special Purpose Vehicles or investment holding entities
Business operating only in the UAE that is fully owned by UAE residents and not a part of any multinational group
Branches of foreign entities whose all relevant income is subject to tax in foreign jurisdictions
Licensees that have not earned income from a relevant activity.
Still, these exempted licensees must submit a Notification form to claim their exemptions to the Regulatory Authorities. Attached to such a form must be sufficient evidence to back up the claim.
Guide to UAE Economic Substance Requirements
If your business is deemed a licensee under the Regulations, you must demonstrate its financial viability. The UAE uses the Economic Substance Test to assess the company's important goals. Additionally, you must send the appropriate Regulatory Authorities an ES report and an annual Notification form.
Test of Economic Substance
High-risk IP firms are subject to a harsher examination while holding company operations are subject to a reduced test. The generic one applies to the remaining applicable license holders.
A general economic substance test is imposed on licensees, requiring them to meet certain criteria:
Direction and Management: The licensee and its relevant activities must be directed and managed within the United Arab Emirates (UAE).
Core Income Generating Activities (CIGAs): The CIGAs associated with each relevant activity must be carried out in the UAE. It's important to note that different relevant activities have their own specific set of CIGAs.
Adequate Presence: The licensee should have a sufficient number of employees, physical assets, and operating expenditure in the UAE.
To meet the requirement of being directed and managed in the UAE, a licensee must hold an adequate number of board meetings within the UAE. These meetings must fulfill the following conditions:
A minimum number of directors must physically attend the meetings in the UAE.
Meeting minutes should be maintained within the UAE.
The attending directors must possess the necessary skills and expertise related to the business.
Regarding employee status, the following considerations apply:
Employees involved in performing the CIGAs must be residents of the UAE.
Non-resident employees will be included in the licensee's economic substance requirements if:
The relevant activities are conducted while these employees are physically present in the UAE.
The licensee is responsible for covering the relevant costs associated with these employees.
Economic substance test for holding company business
According to the ES rules, a holding company business is one that:
Only owns stock in other businesses or corporations and receives income through dividends and capital gains.
According to ES laws, an entity is not regarded as a holding company business if it has other types of assets or generates other types of income.
The reduced test that a holding company business must pass is as follows:
It has enough workers and material resources to carry out the activity and complies with all applicable regulations' compliance criteria.
In the UAE, it is not necessary to demonstrate acceptable spending and management control.
For IP business at high risk
It is required to provide additional documentation and proof and has extensive control over the creation, exploitation, upkeep, protection, and improvement of the intellectual property asset.
The supporting documentation must show that:
The licensee has enough qualified full-time personnel who are permanently based in the UAE and carry out their duties there; it has a business plan outlining the justifications for keeping the IP there; and appropriate decisions have been made there.
Economic Substance Reporting
Economic Substance Reporting is a requirement under the UAE Economic Substance Regulations, which mandates that business entities must submit Notifications and Economic Substance Reports to their designated Regulatory Authorities.
The responsibility of implementing the Economic Substance Regulations (ESR) lies with specific departments appointed by the Cabinet of Ministers. These departments act as Regulatory Authorities and the National Assessing Authority, tasked with overseeing and enforcing the ESR implementation.
The Regulatory Authorities, as the initial point of contact, receive and review the reporting information provided by UAE companies. Their main functions include:
Collecting Notifications and Economic Substance Reports from businesses.
Gathering all relevant information necessary for the reporting process.
Verifying the sufficiency and accuracy of the collected information.
Reporting all the collected information to the National Assessing Authority for final evaluation.
Penalties for Non-compliance
Failing to submit a notification would incur a penalty of AED 20,000.
If an ES report is not submitted, the following consequences would apply:
A fine of AED 50,000.
Inability to demonstrate economic substance.
Providing insufficient or incomplete information would lead to:
A fine ranging from AED 10,000 to 50,000.
Inability to demonstrate economic substance.
The first instance of failure to demonstrate economic substance would result in:
A fine of AED 50,000.
Exchange of information with a foreign authority located where the parent company, ultimate parent company, and ultimate beneficial owner are based.
Repeated failures to demonstrate economic substance would incur:
A fine of AED 400,000.
Exchange of information with a foreign authority located where the parent company, ultimate parent company, and ultimate beneficial owner are based.
Possible suspension or striking off of the company.
Notes for companies registered in RAK
The UAE Economic Substance Regulations are likewise followed by RAK as a member state, from the filing procedure to the imposition of fines. There are several considerations for RAK-registered businesses, nevertheless.
RAK appointed its regulatory authorities to gather and verify the reporting information from pertinent commercial firms.
RAK's regulatory bodies include:
Ras Al Khaimah Economic Zone (RAK EZ), RAK Maritime City, and RAK International Corporate Centre (RAK ICC).
RAK businesses must also submit their Economic Substance Reports and Notifications to the relevant authorities in the emirate for evaluation. By the legislation, they must additionally resubmit the documents to the UAE via the Ministry of Finance's online portal.
Conclusion
In conclusion, companies registered in the UAE, including those in RAK, must comply with the UAE Economic Substance Regulations. However, understanding the requirements and navigating the filing process can be challenging. It is advisable for business owners to seek guidance from a trusted agency to ensure compliance and understand the implementation procedures.
תגובות