Introduction
In December 2017, the European Union (“EU”) Code of Conduct Group on Business Taxation assessed the tax policies of jurisdictions with no or only nominal tax against the criterion of ‘economic substance’. The EU applies three listing criteria, which are aligned with international standards and reflect the good governance standards that Member States comply with themselves, i.e., transparency, fair tax competition and implementation of OECD’s Base Erosion and Profit Shifting (BEPS) minimum standards.
In November 2018, the Organization for Economic Cooperation and Development (‘‘OECD’’) also announced a new global standard on Base Erosion and Profit Shifting (“BEPS”) Action 5 for inclusive framework jurisdictions to prevent business activities from being relocated to the ‘non cooperative jurisdictions’ to avoid the substantial activities requirement that applies to preferential regimes for geographically mobile income.
In response to the above, and to circumvent reputational concerns, governments of the ‘non cooperative jurisdictions’ – Bermuda, British Virgin Islands (BVI), Cayman Islands, Isle of Man, Jersey, Guernsey, Mauritius, Bahamas and Seychelles; enacted legislation introducing enhanced economic substance requirements for tax purposes, bringing the rules into force from 1 January 2019.
UAE also issues economic substance regulations
Following its commitments made to remedy EU concerns and to implement BEPS related measures. the UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”) on 30th April 2019, requiring all in-scope UAE entities that carry on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE with effect from 30th April 2019.
- 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.
What are Relevant Activities?
The following are considered as “Relevant Activities” under the Regulations:
- Banking
- Insurance
- Fund management
- Lease-finance
- Headquarters
- Shipping
- Holding company
- Intellectual property (IP)
- Distribution and service center
What are the economic substance requirements?
An entity must satisfy the following key criteria to meet the Economic Substance Test in relation to any Relevant Activity carried on by it:
- Conduct relevant “core income generating activities” in the UAE;
- Be “directed and managed” in the UAE in relation to that activity; and
- With reference to the level of activities performed in the UAE:
- Have adequate number of qualified full-time employees in the UAE
- Incur an adequate amount of operating expenditure in the UAE
- Have adequate physical assets in the UAE
What are the reporting requirements?
A relevant entity will be required to report specified information on its Relevant Activities on an annual basis to the relevant regulatory authority (that has issued the trade license to such an Entity).
- Existing entities (formed on or before 30th April 2019) – Must comply with the Regulations from 30 April 2019 – first return due in 2020
- New entities (formed after 30th April 2019) – Must comply with the Regulations upon receiving its trade license – first return due in 2020 (or later)
- Failure to comply would result in administrative penalties (not less than AED 10,000 but not exceeding AED 50,000 in the first year, increased to an amount not less than AED 50,000 but not exceeding AED 300,000 in the subsequent year), subject to a 6-year limitation period.
- Additional penalties such as suspending, revoking or not renewing the UAE Relevant Entity’s trade license may also be applicable.
[Source: UAE Ministry of Finance]
