As part of the UAE’s 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 (“EU”) Code of Conduct Group on Business Taxation, the UAE introduced a Resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) on 30 April 2019. Guidance that provides further clarity on the application of the Regulations was issued on 11 September 2019.

The Regulations require all the companies in the UAE that carry out any of the “Relevant Activities” listed below are required to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.

Relevant Activities:
Banking Business
Insurance Business
Investment Fund management Business
Lease - Finance Business
Headquarters Business
Shipping Business
Holding Company Business
Intellectual property Business (“IP")
Distribution and Service Centre Business
The Regulations provide a definition to each of the above Activities
The provisions of the Regulations shall not apply to Companies in which the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital.
The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are governed by the Regulations will need to submit a notification to their Regulatory Authority (defined under Cabinet Decision No (58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards, and prepare and submit to the same Regulatory Authority an economic substance declaration within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019).
An entity is not required to meet the economic substance test and file an economic substance declaration for any financial period in which it has not earned income from a Relevant Activity
Failure by an entity to comply with the Regulations shall result in administrative penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and potential suspension, revocation, or non-renewal of its registration.
Administration
Who needs to notify and by when?

A Licensees that undertakes a Relevant Activity (irrespective of whether the Licensee qualifies for an exemption under the Regulations or has earned income from the Relevant Activity during the relevant financial period) need to submit a simple notification with its Regulatory Authority. Notifications for the financial period 2019 can be filed on or after 1 January 2020.

Who needs to file an economic substance return and by when?

Only Licensees that earn income from a Relevant Activity during the relevant financial period and that are not exempt from the Regulations are required to demonstrate economic substance in the UAE and file an economic substance return. Economic substance returns must be filed within 12 months from the end of the relevant financial period.

What are the penalties for non-compliance?
What are the penalties for non-compliance?
Failure to provide accurate or complete information: Penalty of AED 10k to 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 10k to 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 100k to 300k; and
● Trade / commercial licence could be: suspended, withdrawn, or not renewed.
What are the penalties for non-compliance?
The following is meant as a non-exhaustive list of matters a Licensee should consider (and action, where relevant) before the end of a financial period:
Assess what (if any) Relevant Activities it has performed during the financial period (applying a “substance over form” approach);
Assess the amount and type of income earned (if any) from the Relevant Activity during the financial period;
Hold board meetings with a quorum of directors physically present in the UAE;
Ensure board meeting minutes are signed and maintained in the UAE;
Identify the amount and type of expenses and UAE based assets (incl. premises) in respect of the Relevant Activity, and ensure access to assets (incl. premises) can be demonstrated (through agreements and financial records)
Identify the number of UAE based full-time employees or other personnel (and their qualifications) responsible for carrying on the Licensee’s Relevant Activity; and
Ensure control and supervision over any outsourcing arrangements can be demonstrated, e.g. through contractual agreements. Additional actions may be required to ensure a Licensee can demonstrate sufficient economic substance in the UAE for a relevant financial period, and the considerations above may differ where a Licensee has either a Holding Company or a High Risk IP Business.
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