UAE Economic Substance
In April 2019, the UAE enacted economic substance regulations, which were later repealed by Cabinet Resolution No. 57 of 2020 in August of the same year. These regulations introduced a mandate for UAE entities to establish a sufficient “economic presence” in the UAE corresponding to their undertaken activities.
Applicable to all UAE onshore and free zone companies, as well as certain other business forms, the economic substance requirements pertain to financial years commencing on or after January 1, 2019, for entities engaged in one or more “Relevant Activity.”
Entities meeting the criteria for being “exempt” are not obligated to demonstrate economic presence in the UAE. However, these exempt entities must file a Notification and furnish adequate evidence to substantiate their exempt status.
The implementation of economic substance requirements aligns the UAE with other jurisdictions like the Cayman Islands and Bermuda, reflecting the UAE’s commitment to addressing concerns related to the shifting of profits from certain mobile business activities to jurisdictions with little or no taxation, lacking corresponding local economic activities.
UAE entities are required to evaluate whether their activities fall within the scope of the economic substance regulations and determine how to meet the economic substance requirements for each Relevant Activity. This assessment involves a qualitative and quantitative analysis, considering operational, financial, tax/transfer pricing, legal, and governance aspects.
- What are the Relevant Activities?
- What requirements do UAE entities need to meet?
- What needs to be reported?
- When?
- Penalties
What are the Relevant Activities?
- Activities in the banking sector
- Operations in the insurance industry
- Management of funds
- Engaging in financing or leasing activities
- Centralized headquarters-related activities
- Maritime and shipping operations
- Functions of holding companies
- Holding or exploiting intellectual property (“IP”)
- Distribution of goods acquired from foreign entities
- Providing services to foreign entities
- How we can help
- Impact assessment
- Gap analysis and action plan
Reporting
We can assess which entities and activities are within the scope of the revised economic substance rules and/or whether the entity can benefit from any of the exemptions in the Regulations. This is a critical step for all businesses to determine what to notify to the Regulatory Authorities, and what economic substance requirements need to be met.
As a premier provider of assurance, tax, legal, and business consulting services in the UAE, MAK is well-positioned to assist you in assessing the applicability of UAE substance regulations to your business/entities. We can guide you on how to effectively demonstrate the necessary economic substance in the UAE.
