In April 2019, the UAE issued Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance as part of its 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 Code of Conduct Group on Business Taxation.
On 10 August 2020, the Cabinet of Ministers issued Resolution No.57 of 2020 Concerning Economic Substance Regulations . Resolution 57 amends and repeals Resolution 31, Cabinet of Ministers Resolution No. 58 of 2019, and Cabinet of Ministers Resolution No. 7 of 2020. Following the issuance of Resolution 57, H.E. the Minister of Finance issued new Guidance by way of Ministerial Decision No. 100 of 2020, which also includes an updated Relevant Activities Guide appended as Schedule 1 (“Ministerial Decision 100").
The Regulations require UAE onshore and free zone companies and certain other business forms that carry out certain activities to maintain and demonstrate an adequate “economic presence" in the UAE relative to the activities they undertake. The purpose of the Regulations is to ensure that UAE entities report actual profits that are commensurate with the economic activity undertaken within the UAE.
Resolution 57 and Ministerial Decision 100 (collectively, the “Regulations") have been prepared in consultation with the Organization for Economic Cooperation & Development ('OECD') and the European Union ('EU').
Who is subject to the Regulations?
The Regulations apply to Licensees that carry out any of the following 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
Is a company registered under an ‘offshore’ free zone company regime subject to the Regulations?
Yes, if the ‘offshore’ company undertakes a Relevant Activity.
Who is exempt from the Regulations?
The following Exempted Licensees are exempt from filing an Economic Substance Report and the requirement to demonstrate substance in the UAE:
• A Licensee that is tax resident outside the UAE;
• An Investment fund and its underlying SPVs / investment holding entities;
• A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE;
• A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction.
Sufficient evidence must be submitted along with the Notification form to claim any of the above exemptions. Please refer to the Notification guide for details on the evidential documents that must be submitted,
What is a “Distribution and Service Centre” Business?
A “Distribution and Service Centre" Business refers to two distinct activities that are covered under one “Relevant Activity" heading.
A UAE entity is considered engaged in a Distribution Business if it:
• Purchases goods from a Foreign Connected Person; and
• Distributes those goods
A UAE entity is considered engaged in a Service Centre Business if it:
• Provides services to a Foreign Connected Person
The economic substance requirements for a Distribution and Service Centre Business are applicable to UAE entities whose main activity is distribution and/or service centre operations. Licensees that are mainly engaged in Banking, Insurance, Investment Fund Management, Lease-Finance, Shipping, Intellectual Property or Headquarter Business may also purchase goods for, and/or provide services to foreign group companies as a normal part of their business operations. To prevent duplicate reporting, such Licensees are not also considered engaged in a Distribution and Service Centre Business.
UAE entities that only purchase goods from third parties, or that only provide services to third parties, are not subject to the Regulations (as a Distribution and Service Centre Business).
Holding Company Business
A UAE entity is considered engaged in a Holding Company Business if it:
• Only holds equity interest(s) in juridical person(s); and
• Only earns dividend and capital gains from its equity interest(s)
A UAE entity that holds other assets or earns other forms of income will not be considered a Holding Company Business. Where the holding of such other assets or the performance of other commercial activities constitute a different “Relevant Activity" (e.g. a Lease-Finance Business), the UAE entity would be subject to the Regulations in respect of that other Relevant Activity.
What is a UAE Investment Management Business?
A UAE entity that provides discretionary investment management services to Investment Funds located in the UAE or in a different jurisdiction.
An Investment Fund Management Business includes making discretionary investment, divestment and risk related decisions on behalf of an investment fund. UAE entities providing other types of investment fund related services such as fund administration, investment advisory and custodian services are not considered engaged in an Investment Fund Management Business.
The Investment Fund itself is not considered an Investment Fund Management Business, unless it is a self-managed fund (the Investment Manager and the Investment Fund are part of the same entity).
What is a Lease-Finance Business?
A UAE entity is considered engaged in a Lease-Finance Business if it offers credit or financing for any kind of consideration.
Providing credit includes making loans and entering into other financing arrangements such as hire purchase agreements and finance leases.
Licensees engaged in Banking, Insurance, Headquarters and Investment Fund Management Business may also perform lease or financing activities as a normal part of their business operations. To prevent duplicate reporting, such Licensees are not also considered engaged in a Lease-Finance Business and will not need to separately demonstrate economic substance in respect of any ancillary Lease-Finance activities.
What is a Headquarter Business?
A UAE entity that provides services to other foreign group entities, and through the provision of such services:
• has taken on the responsibility for the overall success of the group; or
• is responsible for an important aspect of the group's performance.
What are the penalties for non-compliance?
Failure to submit a Notification: AED 20k
Failure to submit an Economic Substance Report:
• Penalty of AED 50k; and
• Deemed failure to demonstrate economic substance in the UAE
Failure to provide accurate or complete information:
• Penalty of AED 50k; and
• Deemed failure to demonstrate economic substance in the UAE
Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year:
First failure
• Penalty of AED 50k; and
• Information exchange with foreign competent authority of:
1) parent company,
2) ultimate parent company, and
3) ultimate beneficial owner
Second consecutive instance of failure
• Information exchange with foreign competent authority of:
1) parent company,
2) ultimate parent company, and
3) ultimate beneficial owner; and
• Penalty of AED 400k; and
• Trade / commercial licence could be; suspended, withdrawn or not renewed
