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.
Here is the law: Cabinet of Ministers Resolution No 31 of 2019 Concerning Economic Substance
The law was updated in August 2020 with the release of Cabinet of ministers resolution no 57 of 2020 and Ministerial decision no. 100 for the year 2020.
Here is the Ministry of Finance website with a FAQ on this law.
We propose to simplify this regulation as much as possible with the following explanation:
Step 1: Identify if your company is affected by the law
We invite you to read this decision tree published by the Authorities.
An UAE company with income from one or more of the following sectors will be required to determine whether it has “adequate substance” in the UAE. The sectors concerned are:
– Fund management
– Finance and leasing
– Pure equity holding company
– Intellectual property holding
– Distribution and Service centre business
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”.
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.
This first step will allow you to fill out the ESR notification (usually to be sent before 30/06 of each year).
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:
– is directed and managed in the UAE: this means having a Manager who is resident in the UAE and/or General Assembly/Board of Directors minutes in the UAE;
– has an adequate number of qualified employees, physical presence and expenses commensurate with the level of activity carried out in the UAE.
Here is a guide issued by the Authorities with examples of required activities in the Emirates.
If you do not meet these conditions, you are required (Article 6.2) to create economic substance in the UAE so that your income-generating activity is indeed conducted from the UAE:
– Rent an office in the UAE (lease and electricity bills, etc.);
– Hire staff in the UAE (their number and qualification must be consistent with your turnover);
– The manager and/or employees of the company must be resident in the UAE;
– Keep and file your AGM minutes in the UAE (with the presence of the partners/managers in the UAE on the day of the meeting);
– Have company expenses consistent with your activity.
Step 3: Communicate a report on your substance to the Registry
Before 31/12 of each year, it is required to send a report to the UAE Ministry of Finance (MOF) indicating what economic substance has been put in place for your company or what subcontracting you have put in place to meet it (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 in the first year and up to AED 300,000 in the following year may be imposed (Article 10). In addition, the Authorities will forward the report to the relevant foreign Tax Authorities (of the country of the beneficiary or of its headquarters).
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.
How being assisted about ESR
If you wish to use the assistance of a Tax Agent, the costs are as follows:
– To check whether your company is subject to this regulation or not: AED 1,500
– To fill in the notification for you: AED 1000
– To write the economic substance report: contact us.