Economic substance requirements – New legislation alert
Cabinet Ministers Decision No. 57 of 2020 concerning Economic Substance Requirements (“the Regulations ”), and the accompanying Ministerial Decision No. 100 of 2020 on the issuance of Directive for the Implementation of the Provisions of the Regulations, was published on the 2nd September 2020 repealing and replacing Cabinet Decision No. 31 of 2019 (which we have discussed in further detail here and here).
The Regulations provide a revised and detailed description of the requirements that UAE based entities must address and comply with by the end of the year with certain changes to the requirements for assessing economic substance in the UAE.
1. Distribution and Service Centre Business
The Regulations widen the scope of what businesses are deemed to be conducting the relevant activity of Distribution and Service Centre Business, in terms of which expansion many entities that may have been considered exempt will now have reporting requirements.
2. Exempted Licensees
Exemptions to the Regulations are clarified in significant detail and include the following entities:
- investment funds;
- entities that are tax resident in a jurisdiction other than the UAE;
- entities wholly owned by UAE residents that meet specific criteria; and
- branches of foreign entities whose income is subject to tax in a jurisdiction other than the UAE.
The exempted licensees do not need to satisfy the economic substance test; however, they are required to submit (to the relevant regulatory authority) sufficient evidence substantiating their exemption together with their notification. Failure to furnish sufficient evidence may result in penalty.
3. National Assessing Authority
A “National Assessing Authority” has been appointed, being the Federal Tax Authority, to implement the provisions of the Regulations. The functions of the National Assessing Authority include:
- to assess whether a licensee meets the economic substance test is met by a licensee;
- to impose penalty and hear appeals;
- to exchange information with the Ministry of Finance.
The Ministry of Finance is to launch a portal to facilitate the electronic filing of notifications, reports and other relevant documentation; however, no timeline is identified in respect of when such portal will be available to the public.
4. Administrative Penalty
The penalty provisions identified in the Regulations have extended administrative penalties that may be applied against licensees, including the following (amongst others):
- Penalty for failure to submit the requisite notification by the deadline has been increased to AED 20,000/-.
- Penalty for failure to meet the economic substance test for a financial year has been increased to AED 50,000/-.
- In the event that the licensee fails to meet the economic substance test for two consecutive financial years, the penalty is AED 400,000/- in addition to which the National Assessing Authority may suspend, revoke or refuse renewal of the license of the licensee.
5. Exchange of Information
The Ministry of Finance is empowered under the Regulations to spontaneously exchange information with the relevant foreign competent authorities (by virtue of the Regulations, international agreement, treaty or otherwise) in any of the following cases:
- where a licensee fails to satisfy the economic substance test;
- where a licensee is a High-Risk Intellectual Property licensee;
- where an entity claims to be tax resident in a jurisdiction other than the UAE;
- where a branch of a foreign entity claims that its’ income is subject to tax in a jurisdiction other than the UAE.
Licensees, including those claiming exemption, must identify the jurisdiction in which the ultimate beneficial owner or parent company resides, as well as the jurisdiction that such licensee or foreign company (in the case of a UAE branch) is subject to tax.
Most entities subject to the previously circulated, now repealed, economic substance requirements (2019) were required to file their notifications on or before the 30th June 2020. The Regulations note the report filing deadline for resubmission, or new filing, by the31st December 2020 which date is fast approaching.
All UAE based entities are required to undertake strict analysis as to whether the Regulations apply as well as to ensure that sufficient supporting documentation and information is prepared ahead of the filing date to evidence exemption, or economic substance, as the case may be.
Should you have any questions regarding the UAE Economic Substance Regulations or require assistance in conducting the relevant analysis, please do not hesitate to contact us.
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This article is based on publicly available information and given for informational purposes only. It is not intended as legal advice or as a comprehensive analysis of the matters referred to herein.