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.
Under a separate notification, the regulatory authorities for each activities were prescribed which covers all Economic departments for all mainland entities and all free zone licensing authorities for companies registered with them. Then, Ministry of Finance held a workshop with all regulatory authorities and guided them on the process. There after, now each regulatory authority need to inform entities registered with them of how to comply. It is understood that first there is a requirement to file Notification of whether the regulation applies or not with the regulatory authority and then Economic Substance Return will need to be filed to demonstrate that further conditions of having economic substance locally is indeed fulfilled by the entity.
ECONOMIC SUBSTANCE REGULATIONS An Update and Next Steps
Update and Current status with various Licensing Authorities
Dubai International Financial Center (DIFC) free zone
DIFC was one of the earlier one to initiate the process and send an information email to all companies registered with them. They had earlier prescribed a deadline of 31st March 2020 for all to file a notification through the DIFC Portal, however no format was issued. In March 2020, DIFC issued a notification that deadline is extended and a revised communication with new deadline will be issued later.
Abu Dhabi Global Markets (ADGM) free zone
ADGM authorities had arranged a meeting of representatives of all registered entities along with Ministry of Finance (MoF) representatives to brief them about compliance under ESR regulations. At the meeting in early February 2020, it was mentioned that deadline for filing notification will be 31st March 2020 but again the same has been extended and no new date has yet been notified.
RAS AL Khaimah Free Zone
Amongst all other non financial free zones, RAK took lead and issued a detailed communication about the ESR law to its registered entities. Further in March 2020, RAK ICC has issued a detailed guidelines to all its registered entities to file the notification on the RAK ICC client portal and prescribed detailed format of the notification as well.
The Important aspect to note is that RAK ICC has made it mandatory to file the Notification only if entity is engaged in Relevant activity and notification is a precursor to filing the Economic Substance Return. Thus, it has exempted other entities which feel they are not covered to not take any action at all. Covered entities will need to file the notification on the Portal on or before 30th June 2020.
Dubai Airport Free Zone (DAFZA)
DAFZA has issued an email to all registered entities to file a Economic Substance Notification which is now
available on its client portal by 3rd of May 2020. Further for those which are covered and engaged in Relevant
Activities, a Return is also required which will be prescribed later. Further it issued detailed guidance on how to file the notification and various clarification that entities may need. Notification format has been also updated on the portal for reference by any entities. Further, the guidance note mentions clearly the following:
If a Licensee does not conduct a Relevant Activity or does conduct a Relevant Activity but does not generate any income then the Licensee will be also be exempt. However, in each case the Licensee will still need to make a notification filing.
Thus, all registered entities need to file the Notification at the least and that too by 3rd May 2020.
Ajman Free zone
Ajman free zone authority issued detailed communication to all registered entities that they will need to comply. However no further notification has been issued by the free zone authorities.
Dubai Silicon Oasis (DSO) Free zone
DSO too issued detailed communication to all registered entities that they will need to comply by Mid March 2020. However, there after no further communication has been received and new notification format is also not sent out.
We expect that more free zones and Economic departments to follow suit and issue similar details for all to fill in and submit at prescribed dates. We would urge all to be ready and expect this notification at the earliest.
WAY FORWARD
We believe that all 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. However, all will in any case need to do internal assessment and at least ensure proper compliance.
At FAME, we shall be glad to assist with :
➢ Analyse and Evaluate whether existing set up or operations meet Economic Substance Requirements
➢ Suggest suitable Options available for Meeting these requirements
➢ Assist with reporting requirements with the applicable Regulatory authority
➢ Advise if Suitable restructuring is required to be aligned with Economic Substance Requirements.
Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
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