Insights into the UAE Economic Substance Regulations

UAE Economic Substance

The UAE issued economic substance regulations (the “Regulations”) in April 2019, repealed by Cabinet Resolution No.57 of 2020 in August 2020, which introduced a requirement for UAE entities to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.

The UAE economic substance requirements apply to all UAE onshore and free zone companies and certain other business forms that undertake one or more “Relevant Activity” for financial years commencing on or after 1 January 2019.

Entities that meet the requirements to be treated as “exempt” do not need to demonstrate economic presence in the UAE. However, such entities are required to file a Notification and provide sufficient evidence to support their exempt status

The introduction of economic substance requirements brings the UAE in line with other jurisdictions that have recently issued economic substance legislation (e.g. Cayman Islands, Bermuda, etc.), and affirms the UAE’s commitment to addressing concerns around the shifting of profits derived from certain mobile business activities to “no or nominal tax jurisdictions” without corresponding local economic activities.

UAE entities will need to assess whether and which of their activities fall within the scope of the economic substance regulations, and how to ensure they meet the economic substance requirements in respect of each Relevant Activity. This is both a qualitative and quantitative assessment that would involve consideration of operational, financial, tax / transfer pricing, legal and governance matters.

What are the Relevant Activities?
What requirements do UAE entities need to meet?
What needs to be reported?
When?
Penalties

What are the Relevant Activities?

Banking activities
Insurance activities
Fund management activities
Financing or leasing activities
Headquarters activities
Shipping activities
Holding companies
Intellectual property (“IP”) holding or exploitation
Distribution of goods purchased from foreign connected persons
Provision of services to foreign connected persons

What requirements do UAE entities need to meet?

UAE entities undertaking and earning income from a Relevant Activity in a financial year must perform the related “Core Income Generating Activities” in the UAE by demonstrating that:

The entity and Relevant Activity are being “directed and managed” from the UAE (through holding and minuting board meetings in the UAE, having a UAE based manager and/or directors etc.); and
The entity has an adequate number of qualified employees, premises (e.g. office space), and annual operating expenditures in the UAE relative to the activity undertaken.

It is possible for an entity to carry on more than one Relevant Activity at a time, in which case generally the economic substance requirements will need to be satisfied for each Relevant Activity.

Different economic substance requirements apply depending on the Relevant Activity carried on. For example, pure holding companies are subject to less stringent economic substance requirements, but additional economic substance requirements apply to “high risk” IP related activities.

What needs to be reported?

UAE entities that undertake a Relevant Activity will need to submit an annual notification within six months of their financial year end indicating whether they carry out a Relevant Activity in the financial year and whether any income from that Relevant Activity has been subject to tax outside the UAE. UAE entities that qualify for an exemption from the Regulations, or that did not earn income from their Relevant Activity during a financial period are required to submit a notification.
UAE entities that undertake a Relevant Activity and earn income from the Relevant Activity will also need to file an annual economic substance report, self-assessing whether they met the economic substance requirements, supported by information about the Relevant Activity income earned, the number and qualifications of the staff involved, and information about the premises and other assets used in conducting the Relevant Activity.

When?

Existing entities

Must comply with the regulations from the beginning of their financial year end commencing on or after 1 January 2019, with the first report due 12 months after their financial year end (likely being 31 December 2020 in many cases)

New entities

Must comply with the regulations from the commencement of their financial year, with the first report due 12 months after their financial year end.

Penalties

In addition to exchanging information with foreign authorities, failure to comply would result in administrative penalties of AED 50,000 in the first year of failure, increased to AED 400,000 in the subsequent consecutive year(s) of failure, subject to a six-year limitation period. Additional penalties such as suspending, revoking or not renewing the UAE entity’s trade licence could also apply.

We can assess which entities and activities are within the scope of the revised economic substance rules and/or whether the entity can benefit from any of the exemptions in the Regulations. This is a critical step for all businesses to determine what to notify to the Regulatory Authorities, and what economic substance requirements need to be met.

We can undertake a gap analysis that maps the current substance and corporate governance processes etc. against what is required under the regulations.
Where any “gaps” are identified, we can advise you on appropriate remedial actions and other measures to ensure compliance, such as:
1. The use of outsourcing arrangements;
2. Changes to the operating/business model or transfer pricing policy; and
3. Designing appropriate corporate governance policies, processes and controls.
We can advise you on how to document that Relevant Activities are being “directed and managed” from the UAE through board meeting minutes and other record keeping.
We can advise you on the appropriate level of “economic substance” (relative to the activities undertaken) in the form of management and operational activities.

We can assist you in the preparation and submission of your annual notifications and economic substance report to the Regulatory Authorities.

As a leading provider of assurance, tax, legal and business consulting services in the UAE, PwC is ideally placed to help you in determining whether the UAE substance regulations apply to your business / entities, and how to ensure you can demonstrate the required economic substance in the UAE.

You can now complete our new Economic Substance Regulation online tool

Need help preparing for the filing of your Economic Substance Report in advance of your actual submission? Use our free PwC Economic Substance Reporting (ESR) Tool to:

Fully visualise your proposed responses to the questions in the Economic Substance Report in a pdf format, allowing you to understand and get internal approvals in advance of the formal completion of your Report on the Ministry of Finance’s portal that will go live in December;
Understand in advance what information and supporting documentation you will need to submit/upload; and
Identify gaps and possible areas of risk in terms of meeting the Economic Substance Tests for your entity(ies) using our prop methodologies and databases/information.

COMPLETE THE TOOL HERE