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
Please read Articles 1 and 5 of the law for their definitions.
The official definition of “Distribution and Service Center Business” which falls within the scope of this law is any of the following:
(a) purchasing from a Foreign Connected Person and importing and storing in the State: component parts or materials for goods; or goods ready for sale, and reselling such component parts, materials or goods outside the State.
(b) providing services to Foreign Connected Persons in connection with a business outside the State.
As a reminder, a “Foreign Connected Person” is a natural or juridical person, either resident or non-resident, who is related to one or more natural or juridical person(s) through direct or indirect ownership or control, or common control (see definitions for Connected Person and Foreign Connected Person in Article 1).
To put it simply, if your company in the Emirates invoices for services (consultancy) or goods (trading) to a foreign company in which you, or a legal entity you control is a partner/ agent/ manager/ final beneficiary/ etc., then your company is affected 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.
Step 3: Communicate a report on your substance to the Registries
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.