Economic Substance Regulations in the UAE

UAE introduced the Regulations for Economic substance in 2019 as European Commission included the country in the list of non-cooperative tax jurisdictions. These regulations are similar to economic substance requirements that are introduced by the Cayman Islands and Jersey. This implementation enables the UAE to ensure that the companies that carry out such activities do not illegally boost revenue.

Relevant Activities:

In accordance with the regulations, the companies that are operational in the UAE onshore and free zones along with the enterprises that engage in any of the “Relevant Activities” must keep up and prove a significant “economic presence” in the country relevant to the activities they conduct. Economic substance regulations apply to numerous activities that include:

  • Banking
  • Insurance
  • Investment Fund Management
  • Lease-Finance
  • Headquarters Businesses
  • Shipping
  • Holding Company Businesses
  • Intellectual Property
  • Distribution and Service Centers Businesses

Economic Substance Regulation applicable to the Licensee:

The licensee is subject to the Economic Substance Regulation in the following situations:

  • If the licensee is responsible for generating income in the State.
  • If the licensee is managed along with keeping in view the relevant activity, given the licensee’s board of directors regularly convenes in the state.
  • If the activity needs significant experienced full-time employees who are physically present in the State or if significant funding is on outsourcing the third-party service providers whose operations, personnel, activities, and premises are located in the State. The above-mentioned activities, personnel, funding, and premises must be able to meet the criteria of the Relevant Activity being outsourced. This applies to the physical assets and operating expenses of the State.
  • If there is an involvement of another company in the State’s Core Income-Generating Activity, then the licensee is responsible to manage and monitor the operation of that activity.

Economic Substance Test:

The scenario where the licensee engages only in Holding Company Business which derives its profits from dividends and capital gains requires passing the Economic Substance Test as follows:

  • The licensee must provide documents, data, and details to the concerned Regulatory Authority as per the law liable to the licensee in the State.
  • The licensee has adequate staff and premises to look after the Holding Company Business.

Moreover, businesses that are directly or indirectly owned by the government are exempt from the rule. The companies excluded include the UAE sovereign investment funds and other UAE government-related companies. However, the information on sole proprietorships and branches is scarce.

The concerned company must provide an annual report about the relevant activities to their respective regulatory activity. The newly established businesses must adhere to the laws when they receive their trade license.

Failure to fulfilling the economic substance regulation or providing incorrect information to the regulatory authority can subject your company to a penalty starting from AED 10,000 to AED 300,000. If these acts are continued, it can cause an increase in fines or even suspend the company’s license.

AKA Management Consultancy Services:

AKA provides the following services:

  • Consultation on Economic Substance Regulation
  • Identifying companies that must comply with Economic Substance Regulation
  • Ongoing compliance with Economic Substance Regulation
  • Maintaining records for the Economic Substance Regulation
  • Filing the Economic Substance Regulation with the relevant authorities in the appropriate format

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