The Emirates have put in place an economic substance law. Please note that this new regulation concerns all the so-called “privileged taxation” countries (BVI, Seychelles, Bahamas, Jersey, etc.) and not only the Emirates.
This law is applicable from 2020. It is an opportunity for the Emirates because it is one of the only jurisdictions of the OECD which offers both Zero Taxation and the possibility of having economic substance on location.
We suggest that you read and understand the informatin in the above links in detail for yourself, but we can give you a simplified overview of this regulation for you with the following explanation:
Step 1: Identify if your company is affected by the law
A UAE company with revenues from one or more of the following sectors will be required to determine whether it has the “right stuff” in the UAE. The sectors concerned are:
- Fund management
- Finance and leasing
- Pure equity holding company
- Intellectual property holding
- Distribution and Service business center
A “Distribution and Service Centre Business” is defined as:
“Distribution and Service Centre Business: means a centre that carries out any of the following businesses:
(a) purchasing from a Foreign Connected Person component parts or materials for goods; or goods ready for sale, and reselling such components parts, paterials or goods; or
(b) provident services to Foreign Connected Persons”.
Source: question E.28 of https://www.mof.gov.ae/en/strategicpartnerships/pages/esr.aspx
A Connected Person is: “An entity that is part of the same Group as the Licensee or the Exempted Licensee”.
A “Group” is defined as “two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable thereto”.
So to make it simple, if your company in the UAE invoices for services (consultancy) or goods (trading) to a company of the same group (subsidiary and/or holding of your company in the UAE), your company is concerned by the regulations on economic substance.
Step 2: Check if your company has enough substance in the Emirates
A company in the sector concerned will have to determine whether it has an “adequate substance” in the Emirates. It will be considered to have an adequate substance if this company:
1. is directed and managed in the Emirates: this means
a. having a Manager who is resident in the Emirates
b. conducting the General Assembly/ Board of Directors meetings physically in the Emirates
c. archiving the minutes of said meetings physically in the Emirates;
2. has an adequate number of qualified employees, a physical presence and expenses proportional to the level of activity exercised in the Emirates.
If you do not meet these conditions, 2 solutions (article 6.2):
Solution #1. Create substance for your company:
– Rent an office in the Emirates (lease and electricity bills, etc.);
– Hire staff in the Emirates (their number and qualifications must be consistent with your revenue and activities);
– Make the Manager of the company resident in the Emirates;
– Keep and archive in the Emirates the minutes of the AGM in which the partners/ managers were physically in the Emirates on the day of its holding);
– Be able to provide proof of company expenses consistent with your activity.
Solution #2. Outsource activities related to proving Economic Substance to a company established in the UAE.
We can offer this outsourcing solution to our customers if they cannot or do not wish to organize their economic substance as indicated in solution # 1 above, to include the following services at this time:
- preparation and issuing of your invoices;
staff recruitment and management;
- appointment of manager;
- writing and assistance for the minutes of AGM and Board of Directors;
- entry of accounting entries.
However, please note that we do not recommend setting up this outsourcing solution # 2. We stringly suggest you have real economic substance in the UAE (office, employees, decision-making in the UAE) because, beyond the ESR, it is important that your activity or carried out from the UAE to benefit from the advantages of double-taxation agreement.
Step 3: Communicate a report on your substance to the Registry
Within 12 months of the closure of your accounts (from the accounts for 2019), a report must be submitted to the company register indicating what economic substance has been established for your company or how it has been subcontracted in order to comply with the law (Article 8).
It should be noted that this report may be communicated to a foreign tax administration upon request. It will be systematically communicated if the economic substance requirement is not met in the Emirates (article 9). In this case, a fine of up to AED 50,000 may be applied (article 10).
If you have a company in another jurisdiction and it is going to be “blocked” by this regulation because that jurisdiction cannot offer economic substance solutions (BVI, Seychelles, Bahamas, Jersey, etc.), re-domiciliation of your company in the Emirates is possible. This would ensure continuity of your company (signed contracts, bank accounts, etc.) while allowing it to justify substance in the Emirates.
The end result of the new Economic Substance law is that the Emirates will be able to continue to have zero taxation while no longer being criticized for it by foreign tax administrations. This also explains why the Emirates have been removed from the black list of the OECD and the European Union.
Please contact us if you have any questions.