What you need to know about the UAE Economic Substance law and what you need to do!

Jul 15, 2019 Resources

What you need to know about the UAE Economic Substance law and what you need to do!

The Cabinet Ministers Resolution No.31 of 2019 concerning Economic substance regulation has been issued by the Cabinet of Ministers on April 20, 2019. 

What exactly is this in relation to?

The new Regulation creates a new vision of the UAE in order to be removed from The EU list of non-cooperative jurisdictions for tax purposes, comply with the EU and OECD requirements and reach the highest international standards of taxation. 

Who is subject to the new Regulation? 

UAE mainland and Free zone companies, that carry on a Relevant Activity, excluding entities directly or indirectly owned by the UAE government. 

The full list of Relevant activities under the Regulations listed bellow: 

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

When do you need to pass the Economic Substance test? 

To pass the Economic Substance test, you should meet the following criteria: 

  • Conduct the “core income generating activities” in the UAE;
  • Be “directed and managed” in the UAE; 
  • Have an adequate number of qualified full-time employees in the UAE in relation to that activity that are physically present in the UAE
  • Have premises and adequate level of expenditure to carry out the Relevant activity

Reporting requirements. 

Starting from 2020 every entity should report to the relevant regulatory authority that issued the license to the entity, informing on its Relevant Activities on an annual basis. 

The first return for the existing entities is due in 2020. New entities registered after April 30, 2019 must comply with the Regulation upon receiving the license and the first return due in 2020 or later. 

Sanctions 

Failure to meet the Economic Substance test will be sanctioned by an administrative penalty not less than AED 10,000.00 but not exceeding AED 50,000.00 in the 1st year increased to an amount not less than AED 50,000.00 but not exceeding AED 300,000.00 in the subsequent year.

Risk of falling under the Exchange of Information Rule

If the entity has not met the Economic Substance test for a Financial year, the tax authority may exchange information about the non-compliant entity to the tax authorities, where the parent company or UBO of the entity resides. 

If you have any questions about how this new substance law might concern you, please contact us via info@mf-sol.com and we’ll discuss how to get you compliant in the most effective manner.