1. Why have the Economic Substance Regulations (“the Regulations’) been introduced in UAE?
The Regulations are introduced in UAE to align with OECD’s BEPS Action Plans and affirming UAE’s commitment in addressing concerns around the shifting of profits to “no or nominal tax jurisdictions” without corresponding local economic activities.
2. When do the Regulations enter into force?
The Regulations apply to financial years starting on or after 1 January 2019.
3. Who is covered under the Regulations?
Any entity which qualifies as ‘Licensee’ under the Regulations shall be covered.
4. Who is the ‘Licensee’?
A Licensee is a juridical person or an unincorporated partnership that is registered in the UAE and that undertakes one or more prescribed Relevant Activity.
5. Who are not considered as ‘Licensees’ under the Regulations?
The following persons are not considered as “Licensees” under the Regulations:
- A natural person
- A sole proprietorship
- A Trust
- A Foundation
6. Which are the prescribed Relevant Activities under the Regulations?
The following Relevant Activities are covered under the Regulations:
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Headquarter Businesses
- Lease-Finance Businesses
- Distribution and Service centre Businesses
7. What are the compliance requirements under the Regulations?
The Licensees which undertake one or more of the prescribed Relevant Activity and earn income out of such Relevant Activity are required to submit ‘Annual Notification’ and ‘Economic Substance Report’.
8. What is the timeline to submit the ‘Annual Notification’ and ‘Economic Substance Report’?
Annual Notification must be submitted within six (6) months from the end of the Licensee’s accounting year and Economic Substance Report must be submitted within twelve (12) months from the end of the Licensee’s accounting year.
9. How to file the ‘Annual Notification’ and ‘Economic Substance Report’?
The Annual Notification and Economic Substance Report is required to be submitted through designated ESR portal created on Ministry of Finance (“MOF”) website.
10.What is the penalty amount in case of failure to submit a Notification and Economic Substance Report?
In case of failure to submit the Notification, the authority can levy penalty of AED 20,000.
In case of failure to submit the Report, the authority can levy penalty of AED 50,000 and it can be considered as deemed failure to demonstrate economic substance in the UAE.
11. What information must be submitted in the ‘Annual Notification’?
Following indicative information is required to be submitted in the Annual Notification:
- Licensee details such as Name, Legal form, License number, Financial year end, Registered office address
- Reportable Period
- Relevant activities (“RA”) details such as whether RA carried out during the year, type of RA carried out, whether income earned from such RA, whether such income taxable outside UAE. Whether licensee is “high-risk IP Licensee”, name and country of the immediate parent, ultimate parent, and ultimate beneficial owners in case of high-risk IP Licensee.
12. What information must be included in the ‘Economic Substance Report’?
Following indicative information is required to be included in the Economic Substance Report:
- Square footage area of the premises
- Total income, net profit, and total tangible assets of the Licensee
- Total income, total operating expenditure, and net profit from the RA
- Core Income Generating Activities carried out in relation to RA
- Number of full-time equivalent employee(s) engaged in the RA
- Details of outsourced service provider
- Declaration that Licensee satisfies the Economic Substance Test
- Copy of the standalone financial statements
13. Does a Licensee have to submit the Audited Financial Statements along with the Economic Substance Report?
No, the Licensee may submit unaudited financial statements or management accounts in the absence of Audited Financial Statements. However, it may be advisable to file audited financials wherever possible.
14. Are there any exemptions under the Regulations?
The following class of Licensees are exempt (subject to certain conditions) from submitting the ‘Economic Substance Report’:
- A Licensee that is tax resident outside the UAE.
- An Investment fund and its underlying SPVs / investment holding entities.
- An entity owned by Emiratis or UAE resident which is not part of a multinational group and that only carries on business in the UAE.
- A branch of a foreign entity that is subject to tax outside UAE.
However, the above class of Licensees are still required to submit the ‘Annual Notification’
15. Is there any monetary threshold for undertaking compliances under the Regulations?
There is no monetary threshold for undertaking compliances under the Regulations.
16. What if a Licensee does not undertake any Relevant Activity during a financial period?
If a Licensee does not undertake any Relevant Activity during the financial period, it shall not qualify as ‘Licensee’ under the Regulations and accordingly, shall be out of scope of the Regulations for that financial period.
17. What if a Licensee undertakes a Relevant Activity, but does not earn any income from that activity during a financial period?
A Licensee that undertakes a Relevant Activity but does not earn any income from that activity, is not required to meet the Economic Substance Test and thus, not required to file the ‘Economic Substance Report’ for that financial period.
18. When should a Licensee assess whether it undertakes a Relevant Activity?
This assessment must be done for each financial period starting on or after 1 January 2019 and should consider the activities undertaken by the Licensee at any time throughout the relevant financial period.
19. What are the Economic Substance requirements?
A Licensee must satisfy the following key criteria to meet the Economic Substance Test in relation to any Relevant Activity carried on by it:
- Perform ‘Core Income Generating Activities’ (“CIGAs”) in the UAE.
- Be ‘directed and managed’ in the UAE; 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/premises in the UAE
20. Is ‘Outsourcing’ permitted under the Regulations?
A Licensee can outsource any or all its CIGAs to third parties and / or related parties if the outsourced activities are performed in the UAE. However, a Licensee cannot outsource ‘direction and management’ function.
Further, in the outsourcing arrangement, a Licensee should:
- Have adequate supervision of the outsourced activity; and
- Ensure the outsourced activity is conducted in the UAE; and
- Ensure the outsourcing provider has adequate substance in the UAE; and
- Ensure there is no double counting of the outsourcing provider’s resources.
21. What are the penalties in case of failure to demonstrate economic substance for the relevant financial period?
| In case of First failure |
Second consecutive instance of failure |
- Penalty of AED 50k; and
- Information exchange with foreign competent authority of:
1. Parent company,
2. Ultimate parent company, and
3. Ultimate beneficial owner
|
- Information exchange with foreign competent authority of:
1. Parent company,
2. Ultimate parent company, and
3. Ultimate beneficial owner
- Penalty of AED 400k; and
- Trade / commercial license could be suspended, withdrawn, or not renewed
|
22. How can PKF UAE assist?
- PKF UAE can assist you to get a clear understanding of the Regulations.
- PKF UAE can conduct an impact analysis – studying and analysing the effect of the Regulations on your existing businesses.
- PKF UAE can assist in undertaking relevant compliances under the new regulations.
