As seen in Gulf News
Have you set up your company in line with the new UAE economic substance rules? If you have not yet, do it now – because if the looming deadline passes, be prepared to pay a hefty fine!
Why these new compliance regulations?
“The UAE introduced Economic Substance Regulations in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The issuance of the Economic Substance Regulations on 30 April 2019 (the Regulations), and the subsequent release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019.
The purpose of the Regulations is to ensure that UAE entities that undertake certain activities are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE” and thus have demonstrable economic substance in the UAE from 30th April 2019.
“The UAE introduced Economic Substance Regulations in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The issuance of the Economic Substance Regulations on 30 April 2019 (the Regulations), and the subsequent release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019. The purpose of the Regulations is to ensure that UAE entities that undertake certain activities (“Relevant entities”) are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE” and thus have demonstrable economic substance in the UAE from 30th April 2019.
What are the entities in the scope of the regulations? (“relevant entities’’)?
The regulations apply to all UAE companies, including Free Zones and Offshore companies, that generates income from any of the below activities (“relevant activities”):
- banking business
- insurance business
- Investment fund management business
- headquarters business
- leasing finance business
- shipping business
- holding company business
- intellectual property business
- distribution and services centers business
What are the key objective of the regulations?
The Regulations require companies, characterized as relevant entities, to demonstrate that any of their relevant activities has an effective economic substance in the UAE- ‘’achieves economic substance interest in the UAE’’-by fulfilling all the criteria of the economic substance test:
The Economic substance test is met by a company if the latter:
- conducts the relevant “state core income generating activities” (or “SCIGA”) in the UAE
- is directed and managed in the UAE;
- with reference to the level of the relevant activities carried out in the UAE, has adequate number of qualified full time employees, operating expenditure, physical assets and premises;
In Practice how are defined the criteria?
‘’CIGA’’ (Core Income Generating Activity)
The UAE company must demonstrates that it conducts the CIGA of its relevant activities, as defined in the regulations, in the UAE.
“Directed and managed in the UAE”
Number of criteria to fulfil this requirement are listed in the regulations, such as the frequency of board meetings held in the UAE, the necessity to have a quorum in UAE, competence and necessary expertise of the board, the record and strategic nature of board decisions.
“Adequate number of qualified full time employees, operating expenditure,physical assets”
The fulfilment of this requirement depends on the material elements of the company and its activity which needs to be recorded to evidence the adequacy.
“Outsourcing permitted”
It is permitted to fulfil the required adequacy in respect of the number of qualified full time employees, the operating expenditure and the physical assets by outsourcing all or part of them to an appropriate UAE based services provider.
It is also permitted to outsource the SCIGA under certain conditions of monitoring.
“Reporting requirements”
Existing entities must comply from 19th April 2019 with an annual first reporting due to the relevant authority from 2020.
Thereafter, an annual report, with specific reporting requirements, shall be submitted to the Regulatory Authority no later than twelve (12) months after the last day of the end of each Financial Year of the Licensee
“Sanctions for non-compliance”
Penalties will be applied for non-compliance:
- Administrative financial penalties (up to AED 50,000 for first failure to meet the economic substance test, failure to provide information or provision of inaccurate information to Regulatory Authority and up to AED 300,000 for the second time failure)- statute of limitation of 1 year or 6 years
- exchange of information with the foreign tax authorities of the states where their parent company, ultimate parent company and UBO’s are resident
- refusal to renew, suspension or revocation of entities ‘licenses
The authorised personnel of the Regulatory Authority may at any reasonable hour enter Business Premises to examine and take copies of any Business Document located there.
In brief
If you conduct a business in the UAE or hold shares in a UAE entity, whether or not you operate a relevant activity, we strongly recommend that you audit your corporate structure to upgrade it by reaching the adequate level of economic corporate substance.
UAE entities need to implement their self-assessment to determine whether they are in the scope of the new Economic Substance legislation by undertaking in this respect a 3 steps review procedure:
- Is the UAE entity a Relevant Entity?
- Is it generating income from a Relevant Activity?
- Is it meeting the Economic Substance Requirements? Is it able to pass the Economic Substance Test?
Penalties will be applied for non-compliance:
- Administrative financial penalties (up to AED 50,000 for first failure to meet the economic substance test, failure to provide information or provision of inaccurate information to Regulatory Authority and up to AED 300,000 for the second time failure)- statute of limitation of 1 year or 6 years
- exchange of information with the foreign tax authorities of the states where their parent company, ultimate parent company and UBO’s are resident
- refusal to renew, suspension or revocation of entities ‘licenses
The authorised personnel of the Regulatory Authority may at any reasonable hour enter Business Premises to examine and take copies of any Business Document located there.
How can we assist you?
Wincore Advisory Group can assist you in this regulatory self-assessment to fulfil your compliance legal responsibilities by:
- to get a clear view of the new regulations and your entity’s categorisation
- reviewing internal corporate governance, Management information system and ESR criteria fulfilment
- implementing the most cost & time effective compliant (implementing contractual and delegation arrangements) strategy to help you pass the economic substance test
- providing you with corporate secretarial services and fulfilling your needs at the light of the new regulations
Outsourcing this function to Wincore Advisory Group enables you to meet your obligations in the most efficient way and avoid to waste valuable time and energy in establishing an in-house process.
