Additional Guidance on Economic Substance Regulations in the UAE

Background And Introduction

Following its commitments made to remedy EU concerns and to implement BEPS related measures, the UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 concerning economic substance regulations in the UAE (referred to as “the Regulations”) on 30th April 2019.

In order to provide further clarity and guidance on certain provisions of the Regulations (say, on how the Economic Substance Test can be said to have been met, meaning of certain expressions used in the Regulations for the purpose of economic substance test and so on), the UAE Cabinet has recently issued Ministerial decision no. 215 for the year 2019 on the issuance of directives for the implementation of the Regulations (referred to as ‘the Guidance’), published on the Ministry of Finance website on September 15, 2019.

The Guidance is issued pursuant to provisions of Article 6(6) of the Regulations and intends to serve as a guide to entities carrying out one or more relevant activities as defined in the Regulations.

Key Highlights Of The Guidance Are As Under

  • The license includes a commercial license, certificate of incorporation or other forms of permit required to be procured prior to the licensee being able to carry out a relevant activity;
  • Exempt companies –
    • Commercial companies in which the Government of the UAE, or the Government of any Emirate of the UAE, or any governmental authority or body of any of them has any direct or indirect ownership in its share capital, are considered to be outside the scope of the provisions of the Regulations;
    • The Guidance has further clarified that such companies shall not be subject to the Regulations provided there is at least 51% of direct or indirect ownership in its shareholding by Federal Government, Government of any Emirate of the UAE and so on as discussed above;
  • Meaning of adequacy and appropriate –
    • With respect to the meaning of adequacy or appropriate, the Guidance states that the Licensee is required to maintain sufficient records to demonstrate the adequacy and appropriateness of the resources utilised, expenditures incurred and so on;
    • The business should be engaged in genuine business activity and carrying out core income-generating activities in the UAE with such employees, expenditures and premises which belongs to them;
    • Thus, there is no specific requirement which is suggested by the Regulations / Guidance, however, the Regulatory Authority of the Licensee shall review the adequacy and appropriateness of records and information submitted by the Licensee to demonstrate such adequacy and appropriateness, considering the nature and level of relevant activity conducted by such Licensee;
    • The Guidance has explained in detail the important conditions with respect to outsourcing of state core income-generating activities. Further, the Guidance has also clarified that outsourcing should not be used for circumventing the economic substance test;
  • Clarity on retention of records –
    • The Guidance has clarified that it is advisable to retain any relevant information evidencing compliance with the provisions of the Regulations for a period of 6 years after the end of each financial year. The suggestion is in line with the provisions of Article 7 on the Assessment of whether the Economic Substance Test is met;
    • Any records required to be kept and submitted to the Regulatory Authority must be provided in English;
    • Sector-specific guidance is provided for Holding Company Business, Headquarter Business and High-Risk Intellectual Property Activity. Headquarters Business should be determined based on the services provided to other group companies and not basis the position of such Licensee in the group structure;
  • Submission of information notification as per the Regulations –
    • The Guidance has provided clarity on the notification requirement under Article 8 of the Regulations. Accordingly, Licensee is required to submit a notification to the Regulatory Authority with effect from January 1, 2020, containing information as below:
      • Whether or not Licensee is carrying on a Relevant Activity;
      • Gross income in relation to such Relevant Activity and whether the same is taxed in jurisdiction outside UAE; and
      • Date of end of the financial year;
    • Licensee carrying on a Relevant Activity who is required to satisfy the economic substance test shall within 12 months from the end of its Financial Year (commencing on or after January 1, 2019) submit the report with the required information as per provisions of the Regulations.
  • In addition to the above, the Guidance sets out various functions that are required to be carried out by each Regulatory Authority in detail and prescribes powers provided in order to discharge such functions.

[Source: UAE Ministry of Finance]

How Can PKF Help?

  • PKF can help you get a clear understanding of the new substance requirements applicable in UAE
  • PKF can conduct an impact analysis – studying and analyzing the effect of the new regulations on your existing businesses
  • PKF can assist in relevant compliances under the new regulations


Stany Pereira
Managing Partner
Sarika Dhameja
Director – Tax Services
Chaitanya Kirtikar
Senior Manager

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