The UAE Cabinet has issued the Cabinet of Ministers Resolution No.31 of 2019 (the “Resolution”) which requires all affected UAE entities that carry out certain activities to demonstrate economic substance within the UAE. The Resolution has effect from 30 April 2019.
The regulations stipulate that companies engaged in “Relevant Activities” must have demonstrable economic substance within the UAE. These regulations apply to companies (inclusive of both Free Zone and Onshore/Mainland companies) within the UAE that undertake the ‘Relevant Activities’ mentioned below:
- Banking;
- Insurance;
- Investment Fund Management;
- Lease-Finance;
- Headquarters;
- Shipping;
- Holding Company;
- Intellectual Property (IP); and
- Distribution and Service Centers.
There are a number of criteria that companies in the above sectors will have to satisfy to demonstrate that they pass an “Economic Substance Test”. The Test broadly requires companies undertaking a “Relevant Activity”:
- To conduct their core income generating activity within the UAE;
- To direct and manage the company from within the UAE;
- To retain an “adequate” number of qualified full-time employees and key staff who are physically present within the UAE and ensure there is an “adequate” operating expenditure; and
- To retain “adequate” physical assets within the UAE.
The list is non-exhaustive and gives a strong indication that the legislation is intended to encourage UAE based companies to have demonstrable interest and economic substance in the UAE. The Resolution even extends as far as requiring companies to ensure that key staff have the necessary knowledge and expertise to fulfil their role for that company. The Resolution will require supplementary guidance and further explanation with regards to the practicalities of its implementation, such as what constitutes “adequate” in the context. It is clear however, that companies must file an annual report to the Ministry of Finance, that evidences their fulfilment of the relevant criteria. The Resolution stipulates that failing the test will likely result in a fine, and consecutive failures may lead to the suspension or even revocation of trade licenses. Fines for consecutive failures can be substantial.
One of the key obligations mentioned in the Resolution currently is that companies retain “adequate” physical assets within the UAE. Early indications suggest that flexi-desk leases, which are popular amongst Free Zone companies in the UAE, may not satisfy this criterion. There is no further information at this stage, and we will provide an update once the position has been clarified.
Companies undertaking “Relevant Activities” will not only have to satisfy the obligations mentioned above, but they must also make an annual declaration to the Ministry of Finance stating whether they are carrying out a “Relevant Activity” and whether any part of the company’s income is subject to a foreign tax jurisdiction outside of the UAE, among other information. The report mentioned above forms part of this declaration, which also requires information pertaining to the number of qualified employees and key staff, details regarding expenditure and accountancy information such as the company’s financial year dates.
By implementing these regulations, the UAE is attempting to align itself with European Member State governance laws and European best practice in the area, which intends to promote transparency and fair tax competition. The UAE is one of a number of jurisdictions, such as the British Virgin Islands (BVI), the Cayman Islands, and Jersey, to name but a few, that have recently introduced legislation incorporating the above economic substance requirements.
Given that the Resolution is already in effect, we strongly advise all UAE based companies undertaking a “Relevant Activity” within the UAE, to seek expert legal advice in relation to their ongoing compliance obligations.
For further information in relation to the new economic substance requirements, and for advice on how to ensure that your company stays compliant, please contact us on +971 4 343 8897.
