Economic Substance Regulations in UAE

Economic Substance Regulations in UAE

The United Arab Emirates Cabinet recently issued resolution that requires all in-scope UAE entities to maintain an economic substance.

Economic Substance Regulation was introduced by the UAE government in order to align the entire region with global standards set by the Organization for Economic Cooperation and Development (OECD) Forum on Harmful Trade Practices with  prevention of Base Erosion and Profit/Income Shifting (BEPS).

According to FHTP, a company should perform substantial business activities in a jurisdiction. The UAE was added to the European Union list of non-cooperative tax jurisdictions by the European Commission, which is the reason for the issuance of the economic substance regulations.

UAE Economic Substance Regulations are similar to the economic substance requirements that were recently implemented in jurisdictions that include Cayman Islands and Jersey.

Applicability

Economic substance regulation will be applicable to onshore and free zone companies that engage in any of the below mentioned “Relevant Activities”;

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management Businesses
  • Lease-Finance Businesses
  • Headquarters Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service Centres Businesses

Requirements for Reporting

Business entities that derive income from a Relevant Activity in UAE every year has to demonstrate that it has a sufficient level of economic substance that allows it in carrying out a Relevant Activity. All qualified licensees have to prepare a report and submit it to relevant Regulating Authorities which include the following information listed below.

  • Type of the Relevant Activity that the business conducts
  • Type and amount of relevant income with respect to every Relevant Activity
  • Place or location of business
  • Type and amount of operating expense with respect to every Relevant Activity
  • Number of employees working full time
  • Details regarding the Core Income/Profit Generating Activities (CIGAs) conducted by the business
  • Detailed information regarding the activities that are outsourced by the business
  • Declaration of whether or not a business licensed in UAE satisfies the UAE Economic Substance Test

Economic Substance Test

Economic Substance Regulations applies to a business if it meets the following criteria in Economic Substance Test:

  • If the UAE licensee business conducts a Core Income/Profit Generating Activity (CIGA) in UAE.
  • If the business is managed and directed in the country (UAE).
  • Have sufficient number of full time employees.
  • Have sufficient operating expenditure that is incurred in UAE.
  • Have sufficient physical assets in UAE.

Penalty

In case the business entity has not earned any income from the mentioned relevant activities in the financial period, it does not have to file for any economic substance declaration.

If the business entity meets the specified requirements but fails to comply with the regulations, then they will have to pay a penalty ranging from AED 10,000-50,000.

If the regulatory authority determines that an entity is not meeting the Economic Substance Test repeatedly, a penalty between AED 50,000-300,000 may be imposed. The authority may also suspend, revoke or deny the renewal of the company’s license.

Need help?

Horizon Biz Consultancy can help with its Check-up and Compliance routine.

We are one of the leading accounting and auditing firms in UAE and can help in checking up your applicability of ESR and compliance related requirements. Also helping you with the Ongoing ESR compliance and business readiness for the ESR.

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