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UAE introduces the "Economic Substance Regulation"

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The United Arab Emirates (UAE) has put into operation the "Economic Substance Regulation" in accordance with the Resolution No.31 of the Council of Ministers of 2019, of April 30th, 2019. This regulation requires that companies that are registered in the UAE, either in the mainland or in the free zone, and that carry out one or more of the “relevant activities” demonstrate the economic substance that they bring to the UAE.

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The introduction of this regulation demonstrates the UAE's commitment to complying with EU requirements and not becoming part of the EU list of non-cooperative jurisdictions for tax purposes (the EU black list) again.

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The following are considered "relevant activities" under the Regulation:

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  • Banking

  • Insurance

  • Fund management

  • Financial leasing

  • Headquarters

  • Logistics

  • Holding companies

  • Intellectual property (IP)

  • Distribution and service center

 

Companies that carry out any of the relevant activities must meet the following requirements to justify the economic substance they provide. To do this, they must:

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  • Carry out relevant central income generating activities in UAE;

  • That these activities be directed and administered from the UAE;

  • And, with reference to the level of activities carried out in the UAE:

    • Have an adequate number of qualified full-time employees in the UAE;

    • Incur an adequate amount of operating expenses.

 

Although at first glance it may appear that your business activities are not part of the “relevant activities”, this does not mean that they are outside the scope of the Regulation. As an example, the activity "financial leasing" includes any financing between companies in the same group that includes any percentage of interest on the amount loaned.

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For this reason, we ask our clients to inform us if they have any type of inter-company financing, to determine if it falls within the scope of the Regulation.

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Companies that do not meet the requirements could risk fines of between AED 10,000-50,000, as well as penalties, suspensions, or cancellation of licenses.

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UAE RLD Team

13.05.220

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