Economic substance requirements introduced in the UAE
The European Union (“EU”) Code of Conduct Group published a list, in December 2017, noting ‘non-cooperative jurisdictions for tax purposes’ and providing an opportunity for the respective governments to address the concerns in order to avoid being blacklisted. To meet the EU deadline, as well as the OECD’s Base Erosion and Profit Shifting requirements, many of the listed countries enacted legislation to circumvent reputational concerns and ensure their compliance including Bermuda, the British Virgin Islands and the Cayman Islands in early 2019.
Mounting international pressure toward transparency and accountability, as well as the EU and OECD requirements, have led to economic substance requirements steadily being implemented across the listed jurisdictions, and thus they have avoided being blacklisted. The UAE, however, was included on the EU blacklist around March 2019.
On the 30th April 2019, the UAE Cabinet issued Decision No. 31 of 2019 (“the Regulations”) on the specification of the requirements of the real economic activities, directing that, where previously not expressly required, certain UAE entities carrying out Related Activities in the State will have to demonstrate ‘economic substance’ as per the Regulations.
The Regulations support the UAE’s commitment to meeting the EU and the OECD requirements, and it is anticipated that this will assist in the removal of the UAE from the EU blacklist in due course.
In terms of Article 6 of the Regulations, entities carrying out Related Activities will need to send a notification to the Regulatory Authority confirming that:
- The licensee exercises an activity in the State that generates a major income;
- The direction and management of the entity in respect of that activity takes place within the State; and
- The entity has an appropriate number of qualified personnel employed full-time in that activity and physically present in the State.
Further and other economic substance requirements are set out in the Regulations and shall apply depending upon the activity and circumstances of the entity concerned.
In terms of Article 4 of the Regulations sets out those activities considered as a ‘Related Activity’ as any of the following:
- Banking activities
- Insurance Works
- Investment Funds Management Work
- Financial Leasing Work
- Head Office Work
- Shipping Work
- Holding Company Work
- Intellectual Property Work
- Distribution and Service Provision Centres
Which entities may be licensed in the State, as well as in a Free Zone or Financial Free Zone.
Worthy to note, the Regulations do permit the assignment of third party service providers to carry out the Related Activity, or a portion thereof, and the Regulations should not have any impact upon legitimate commercial operations carried out by UAE businesses at date.
Businesses carrying out a Related Activity remotely, however, will need to make adjustments to ensure that they fall in line with the Regulations to avoid penalty which may include administrative fine determined by the Regulatory Authority.
The Regulations announced are a positive development toward the realization of global transparency and accountability – with the UAE as a welcome participant. Should you require assistance or wish to learn more of the potential impact the Regulations may have on you or your business, please do not hesitate to contact us.
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