On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic
substance regulations in the UAE, “the Regulations”), requiring all in-scope UAE entities (“Relevant Entities”) that carry
on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE from 30 April 2019.
They introduce a legal requirement for all UAE entities to locally maintain ‘economic substance’ in line with
the level and type of activity they undertake. The economic substance can broadly be considered to
• consist of carrying on core income generating activities,
• Having employees and premises, and
• management, and costs.
There are also regulatory filing requirements that need to be met in order to comply with the regulations. The
regulations have been issued in response to European Commission concerns which resulted in the UAE being added
to the European Union list of non-cooperative tax jurisdictions.
All UAE entities will need to examine whether they meet the ‘economic substance’ requirements and consider how they will comply with the regulations.
Scope of Regulations
The Regulations apply to all UAE onshore and free zone companies that carry on a "Relevant Activity". Entities that are directly or indirectly owned by the UAE government (both federal and local) are specifically excluded from the Regulations.
Relevant Activity – Coverage
The following are considered as “Relevant Activities” under the Regulations:
Any UAE entity that undertakes “Relevant Activities” which consist of any of the following businesses licensed in the UAE, (mainland and/or free trade zones):
• Banking means licensed in the State, including Banking Businesses licensed in a Free Zone or a Financial Free Zone.
• Insurance means businesses as licensed in the State, including Insurance Businesses licensed in a Free Zone or a Financial Free Zone.
• Investment fund management means businesses as licensed in the State, including Investment Fund Management Businesses licensed in a Free Zone or a Financial Free Zone.
• Lease finance means businesses as licensed in the State, including Lease-Finance Businesses licensed in a Free Zone
or a Financial Free Zone.
• Headquarters means the business of providing any of the following services to one or more Foreign Connected Person by the Licensee.
(a) the provision of senior management.
(b) the assumption or control of material risk for activities carried out by, or assets owned by, any Foreign Connected Person.
(c) the provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (b) of this Definition.
• Shipping business means any of the following activities involving the operation of a Ship anywhere in the world other than within the territorial waters of the State:
(a) the business of transporting, by sea, persons, animals, goods or mail.
(b) the chartering of ships for the purpose described in subparagraph (a).
(c) the sale of travel tickets or equivalent, and ancillary services connected with the operation of a ship.
(d) the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea.
(e) the management of the crew of a Ship.
• Holding company is to mean a business that is:
(a) a Holding Company in accordance with the law applicable to the Licensee carrying out such activity in the State.
(b) has as its primary function the acquisition and holding of shares or equitable interests in other companies.
(c) does not carry on any other commercial activity.
• Intellectual property business means a business which holds, exploits, or receives income from the Intellectual Property Asset(s).
Income in respect of an intellectual property asset includes any of the following:
(b) income from a franchise agreement.
(c) income from licensing the intangible asset.
(d) income from capital gains and other income derived from the sale of an Intellectual Property Asset.
Intellectual Property Asset means any intellectual property right in intangible assets, including but not limited to copyright, patents, trademarks, brand, and technical know-how, from which identifiable income accrues to the business (such income being separately identifiable from any income generated from any tangible asset in which the right subsists)
• Distribution and service centers:
any of the following businesses:
(a) purchasing from a Foreign Connected Person and importing and storing in the State: component parts or materials for goods; or goods ready for sale, and reselling such component parts, materials or goods outside the State.
(b) providing services to Foreign Connected Persons in connection with a business outside the State.
Thus, though, Trading entities per se are not covered, entities which are part of multinational group which act as distribution or Service centers where they deal with connected or related parties – those will get covered within these regulations.
Commercial companies that have any level of direct or indirect government (state and/or federal) ownership are currently out of the scope of the Regulations.
Economic Substance – Meaning and Criteria
To satisfy the economic substance requirements in relation to a Relevant Activity, a Relevant Entity must:
Conduct the relevant “core income-generating activities” in the UAE. Further what would be considered as Core Income Generating activity for each of the relevant activities are further described in the Next Segment;
Be “directed and managed” in the UAE; this test is satisfied if the following conditions are met:
(a) the Licensee’s board of directors meets in the State at an adequate frequency having regard to the amount of decision-making required at that level.
(b) at such board meetings, there is a quorum of directors physically present in the State.
(c) the meetings are recorded in written minutes and signed by the directors attending the meetings.
(d) the minutes of such board meetings record the making of strategic decisions of the Licensee at the meeting.
(e) the directors of the Licensee have the necessary knowledge and expertise to discharge the duties of the board.
(f) the minutes of all board meetings and the records of the Licensee are kept in the State.
(g) In the case of branch offices and representative offices of foreign companies and other commercial companies that do not have a board of directors but rather are managed and operated by a single manger, such manager shall be physically present in the State when taking key decision relating to the management and operation of these entities.
With reference to the level of activities performed in the UAE or incur an adequate amount of operating expenditure in the UAE or have adequate physical assets in the UAE.
- if there is an adequate number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts),
- or adequate level of expenditure on outsourcing to third party service providers, whose activities, employees, expenditure, and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced. In the case of State Core Income-Generating Activity carried out for the relevant
Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.
Licensee may elect to outsource a Relevant Activity to third party service providers, provided that:
i. the Licensee is able to demonstrate adequate supervision of the outsourced activity.
ii. the outsourced activity is conducted in the State.
iii. the economic substance of service providers will not be counted multiple times by multiple Licensees when evidencing their own substance in the State.
In relation to a Licensee whose activity is restricted to carrying out a Holding Company Business that derives its income from dividends and capital gains only, such Licensee meets the Economic Substance Test if it meets the following conditions:
(a) Complies with the requirement to submit any documents, records or information to the relevant Regulatory Authority in accordance with the law applicable to the Licensee in the State.
(b) Has adequate employees and premises for holding and managing the Holding Company Business.
The above shall not apply to a Holding Company Business that derives income from other sources other than dividends and capital gains from its equity interest. In relation to such company, the state Core Income-Generating Activities shall be those activities associated with the income generated.
A Relevant Entity that only undertakes a Holding Company Business will be subject to less stringent economic substance requirements. Additional requirements apply if a Relevant Entity carries out “high-risk IP related activities”.
If a Relevant Entity carries out more than one Relevant Activity, the economic substance requirements must be met for each of the Relevant Activities.
State Core Income Generating Activities (CIGA) for Each of Relevant Activity – Illustrated in Regulations
“State Core Income-Generating Activities” means activities that must be conducted by a Licensee in the State and shall include:
(a) raising funds, managing risk including credit, currency and interest risk.
(b) taking hedging positions.
(c) providing loans, credit or other financial services to customers.
(d) managing capital and preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business.
(a) predicting and calculating risk.
(b) insuring or re-insuring against risk and providing Insurance Business services to clients.
(c) Underwriting insurance and reinsurance.
Investment Fund management
(a) taking decisions on the holding and selling of investments.
(b) calculating risk and reserves.
(c) taking decisions on currency or interest fluctuations and hedging positions.
(d) preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business.
(a) agreeing funding terms.
(b) identifying and acquiring assets to be leased (in the case of leasing).
(c) setting the terms and duration of any financing or leasing.
(d) monitoring and revising any agreements.
(e) managing any risks.
(a) taking relevant management decisions.
(b) incurring operating expenditures on behalf of group entities.
(c) coordinating group activities.
(a) managing crew (including hiring, paying and overseeing crew members).
(b) overhauling and maintaining ships.
(c) overseeing and tracking shipping.
(d) determining what goods to order and when to deliver them, organising and overseeing voyages.
all activities related to that business; and in respect of Holding Company Business that derives income from other sources other than dividends and capital gains from its equity interest, the state Core Income-Generating Activities shall be those activities associated with the income generated.
Intellectual property (IP)
(a) where the Intellectual Property Asset is a -
i. patent or an asset that is similar to a patent, research and development.
ii. non-trade intangible (including a trademark), branding, marketing and distribution.
(b) if the Relevant Activity is conducted by a Licensee that is regarded as a High Risk IP Licensee, the State Core Income-Generating Activity must include any of the following additional activities:
i. taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income.
ii. taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset.
iii. carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties.
Distribution and service center
(a) transporting and storing component parts, materials or goods ready for sale.
(b) managing inventories.
(c) taking orders.
(d) providing consulting or other administrative services
Reporting Requirements and contents – Consequence of Failure to Report
1. A Licensee shall notify the Regulatory Authority annually of the following -
(a) whether or not it is carrying on a Relevant Activity.
(b) if the Licensee is carrying on a Relevant Activity; whether or not all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax in a jurisdiction outside of the State, in all cases such Licensee shall provide the Regulatory Authority with all information and documentation required to be submitted by it pursuant to this Resolution or any further guidance or decision issued pursuant to this Resolution.
(c) the date of the end of its Financial Year.
2. The report is to be submitted no later than twelve (12) months after the last day of the end of each Financial Year of the Licensee, and it shall be in the form approved by the Competent Authority and shall include the following information with respect to the Licensee –
(a) the type of Relevant Activity conducted by it.
(b) the amount and type of relevant income in respect of the Relevant Activity.
(c) the amount and type of operating expenses and assets in respect of the Relevant Activity.
(d) the location of the place of business and, if applicable, plant, property or equipment used for the Relevant Activity of the Licensee in the State.
(e) the number of full-time employees with qualifications and the number of personnel who are responsible for carrying on the Licensee’s Relevant Activity.
(f) information showing the State Core Income-Generating Activity in respect of the Relevant Activity that has been conducted.
(g) a declaration as to whether or not the Licensee satisfies the Economic Substance Test.
(h) in the case of a Relevant Activity being an Intellectual Property Business, a declaration as to whether or not it is a high risk intellectual property business. If the Licensee declares that it is a high risk intellectual property business, the Licensee shall provide the information under paragraph (i) to refute a determination made by the Regulatory.
(i) in the case of a Licensee that is carrying on a high risk intellectual property business the following additional information must be provided:
i. Information demonstrating that the Licensee does and historically has exercised a high degree of control over the development, exploitation, maintenance, enhancement and protection of the intellectual property asset by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the State.
ii. business plan showing the reasons for holding the ownership in the Intellectual Property Asset in the State.
iii. employee information, including level of experience, type of contracts, qualifications and duration of employment with the Licensee.
iv. evidence that decision making is taking place within the State.
(k)where a Relevant Activity is outsourced by a Licensee, the Licensee must demonstrate the following:
i. the Relevant Activity that is outsourced is a Core Income-Generating Activity being carried out in the State.
ii. the Licensee has adequate supervision of the Relevant Activity outsourced.
iii. the Licensee shall submit to the Regulatory Authority a report containing information in relation to the level of resources employed by the third party service provider to which the Relevant Activity is being outsourced, demonstrating that the service provider’s activities, employees, operating expenditures and premises in the State are adequate in relation to the level of Relevant Activity outsourced.
A Relevant Entity will be required to report certain information on its Relevant Activities on an annual basis to the relevant regulatory authority (being the authority that issued the trade license to the Relevant Entity
An amount of administrative penalty of not less than dirhams ten thousand (AED 10,000) and not exceeding dirhams fifty thousand (AED 50,000) shall be imposed for failure to meet the Economic Substance Test
An amount of administrative penalty of not less than dirhams fifty thousand (AED 50,000) and not exceeding dirhams three hundred thousand (AED 300,000) shall be imposed for failure to meet the Economic Substance Test if the Regulatory Authority has determined that, for the Financial year following a Financial Year in which a notice was issued under Clause 2 of this Article, (Further Financial Year), the Licensee has failed to meet the Economic Substance Test pursuant to Article 7 of this Resolution
An amount of an administrative penalty of not less than dirhams ten thousand (AED 10,000) and not exceeding dirhams fifty thousand (AED 50,000) if the Licensee commits any of the following offences:
(a) if it fails to provide information that the Licensee is required to provide under Article 8 of this Resolution.
(b) if it provides inaccurate information to the Regulatory Authority and knows of the inaccuracy at the time the information is provided but does not inform the Regulatory Authority at that time of it discovering the inaccuracy
after the information is provided to the Regulatory Authority.
Existing entities must comply with the Regulations from 30 April 2019, with the first return due in 2020
New entities must comply with the Regulations upon receiving its trade license, with the first return due in 2020 (or later)
Entities in the UAE need to assess whether they are performing relevant activities. Entities that hold intellectual property as well as those outsource significant amount of their activities will be affected. Groups may consider restructuring as against simply increasing the level of economic activity.
The Regulations should not have major impact on UAE based operational businesses and foreign multinationals that have genuine commercial operations and management in the UAE.
At FAME, we shall be glad to assist with :
For further details, contact:
MR. NIRAV SHAH
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