Economic Substance Regulations Dubai
The economic Substance Regulations Dubai, is a set of economic policies and rules that the UAE has recently assembled. The regulations involve a number of instructions that are put together by the regulation authorities called as the Cabinet of Ministers Resolution. This amendment has been applied and updated since April 2019.
The economic Substance Regulations is for those businesses and entities that have relevant activities which they are working on. The list of these activities and all the clauses that explain which bodies fit in the criteria are given further. The UAE believes in having a complete record of the economic ups and downs these entities go through.
Economic Substance Regulations Dubai issued (Cabinet of Ministers Resolution No. 31 of 2019), the “Regulations” on 30 April 2019 as a category of the commitments in the name of membership the OCED Inclusive Framework. This issue was a response to a test of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation. The guidelines on the applications of these regulations were issued on 11 September 2019 (Ministerial Decision No. 215 of 2019). The Regulatory Authorities responsible for the enforcement and administration of the Economic Substance Regulations Dubai are listed under Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies. The needful amendments to the Economic Substance Regulations were approved by Cabinet of Ministers Resolution No. (57) Of 2020 on 10 August 2020. Post the approval there were the changes and the updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020. The economic substance regulation Dubai needs onshore and free zone companies and certain other business forms that conduct any of the “Relevant Activities” mentioned below, to represent as well as maintain an adequate “economic presence” in the UAE (“Economic Substance Test”).
• Banking Business
• Insurance Business
• Investment Fund management Business
• Lease – Finance Business
• Headquarters Business
• Shipping Business
• Holding Company Business
• Intellectual property Business (“IP”)
• Distribution and Service Centre Business
The Economic Substance Regulations Dubai applies to all the financial years that will commence on/from 1 January 2019. The bodies that fall under the parameters of the Economic Substance Regulations Dubai are supposed to submit an annual notice form to their Authority. They are also expected to complete an Economic Substance Report within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019) and submit to the same authority. Any functioning body that has not earned an income from the list of relevant activity or is on the edge of being exempted will not meet the Economic Substance Test and file an Economic Substance Report for that financial period. Although, the particular body still has to submit a notification form, regardless of their conditions. If the body fails to follow the Economic Substance Regulations Dubai will face penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and other administrative sanctions like suspension, revocation, or non-renewal of the body’s trade license or permit.
1. Why has the UAE introduced Economic Substance Regulations?
In April 2019 a Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance (“Resolution 31″) were issued under the tag of membership with OECD Inclusive Framework and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation.
The Cabinet of Ministers then updated and issued the set of regulation No.57 of 2020 Concerning Economic Substance Regulations (“Resolution 57″) on 10 August 2020. Resolution 57 amends and repeals Resolution 31, Cabinet of Ministers Resolution No. 58 of 2019, and Cabinet of Ministers Resolution No. 7 of 2020.
After Resolution 57 was issued, H.E. the Minister of Finance issued new Guidelines concerning the Ministerial Decision No. 100 of 2020, which also involves a new version of Relevant Activities Guide appended as Schedule 1 (“Ministerial Decision 100″).
The economic substance regulation Dubai needs onshore and free zone companies and certain other business forms that conduct any of the “Relevant Activities” (Licensees – See Question 5) to represent as well as maintain an adequate “economic presence” in the UAE (“Economic Substance Test”). The purpose of the Regulations is to make sure that UAE functioning bodies report actual profits that are commensurate with the economic activity undertaken within the UAE.
Resolution 57 and Ministerial Decision 100 (collectively, the “Regulations”) have been prepared after consulting with the Organization for Economic Cooperation & Development (‘OECD’) and the European Union (‘EU’).
2. When do the Regulations enter into force?
The Regulations apply to financial years starting on or after 1 January 2019.
Example 1: A UAE company with 1 January 2019 – 31 December 2019 financial year:
The first non-exempt taxable period would be 1 January 2019 to 31 December 2019.
Example 2: A UAE company with 1 April 2019 – 31 March 2020 financial year:
The first non-exempt taxable period would be 1 April 2019 to 31 March 2020.
No need to match up with the Economic Substance Regulations Dubai for the period 1 January 2019 – 31 March 2019.
Example 3: A UAE company with 1 July 2018 – 30 June 2019 financial year:
The first non-exempt taxable period would be 1 July 2019 – 30 June 2020.
No need to follow up on the Economic Substance Regulations Dubai for the period 1 July 2018 – 30 June 2019.
3. Who are the “Regulatory Authorities”?
The Economic Substance Regulations are administered by the Regulatory Authorities listed in Article 4 of the Regulations, and set out below:
Ministry of Economy
Security and Commodities Authority
Abu Dhabi Global Market
Media Zone Authority Dhabi
Abu Dhabi Airports Free Zone
Abu Dhabi Ports
Dubai Airport Free Zone
Dubai Healthcare City Authority
Dubai International Financial Center
Dubai South / Dubai Aviation City
Jebel Ali Free Zone Authority/ DP World
Dubai World Trade Center
Dubai Humanitarian City
Dubai Development Authority
Dubai Silicon Oasis
Dubai Maritime City
Dubai Multi Commodities Centre
Sharjah Airport International Free Zone Authority
Hamriyah Free Zone Authority
Sharjah Media City (Shams)
Sharjah Publishing City
Sharjah Research Technology and Innovation Park
Sharjah Healthcare City
Ajman Free Zone Authority
Ajman Media Free Zone Authority
RAK International Corporate Centre
Ras Al Khaimah Economic Zone
RAK Maritime City
UAQ Free Trade Zone
Fujairah Free Zone
International Free Zone Authority
Fujairah Creative City
These Regulatory Authorities are responsible for the monitoring in compliance with the Notification and reporting any mistakes under this Economic Substance Regulations Dubai. They are supposed to identify possible Licensees, validate the submitted information, and determine whether a relevant functioning body meets the requirements that are to be treated as exempt as well as share the respected information with the UAE Federal Tax Authority and the UAE Ministry of Finance.
4. Who is the “National Assessing Authority”?
The assessment and determination on whether a Licensee has economic substance in the UAE are constructed by the Federal Tax Authority, in its power as the “National Assessing Authority” under the Economic Substance Regulations Dubai.
5. Who is subject to the Regulations?
The Regulations apply to Licensees that carry out any of the following Relevant Activities.
● Banking Businesses
● Insurance Businesses
● Investment Fund Management Businesses
● Lease-Finance Businesses
● Headquarter Businesses
● Shipping Businesses
● Holding Company Businesses
● Intellectual Property Businesses
● Distribution and Service center Businesses
Please refer to Schedule 1 of Ministerial Decision 100 for any validation and detailed understanding of each activity.
6. What is a Licensee?
A Licensee is a juridical person or an unincorporated partnership that is registered in the UAE and that commits to any of the Relevant Activities.
For example, a Licensee can be:
● A limited liability company
● A private shareholding company
● A public shareholding company
● A joint venture company
● A partnership (e.g. a limited liability partnership, a limited partnership, a general partnership, etc.)
The following persons are not considered “Licensees” under the Regulations:
● A natural person
● A sole proprietorship
● A Trust
● A Foundation
7. Are branches subject to the Regulations?
As per the Economic Substance Regulations Dubai, the registered branches in the UAE are an extended part of their “parent” or “head office” and do not have separate legal personality. Although, a registered “parent” or “head office” in the UAE must file as a single Licensee, reporting it’s working on any of the Relevant Activities and all its branches in one composite Notification and/or Economic Substance Report.
A UAE branch of a foreign entity that takes upon a Relevant Activity that falls under the Economic Substance Regulation Dubai would be required to follow the Economic Substance Regulations just like a separate legal person unless the Relevant Income of the branch is within the scope of taxation in the jurisdiction of the foreign parent/head office.
The “subject to tax” test is met where the income of the UAE branch is taken into account when calculating the taxable income of the foreign parent/head office or other relevant group entity. The reporting of the Relevant Income of the UAE branch is mandatory for corporate income tax purposes, irrespective of whether the income of the UAE branch can benefit from an exemption or any other form of corporate tax relief in the foreign jurisdiction under domestic tax law or a double tax agreement.
If a UAE entity works on a Relevant Activity through a branch registered outside of the UAE, that entity is not required to report the activities and income of the foreign branch for purposes of the Economic Substance Regulations Dubai, provided the Relevant Income of the foreign branch is subject to tax in the foreign jurisdiction where the branch is located. In this context, a branch can include a permanent establishment or any other form of taxable presence for corporate income tax purposes which is not considered as a separate legal entity.
8. What does it mean to be subject to the Regulations?
Administration of Economic Substance Regulation (For additional information refer to Section K)
Licensees that have a Relevant Activity are required to file an annual Notification within six months starting from the end of the relevant financial period (refer to Administration).
Additionally, the Licensees that earn income from their Relevant Activity/activities are also required to file an Economic Substance Report within 12 months from the end of the relevant financial period (see Administration).
Demonstrating the substance of Economic Substance Regulation
For every financial period in which a Licensee earns income from any Relevant Activity, it will need to pass an Economic Substance Test about that activity.
The Economic Substance Test requires a Licensee to demonstrate that:
● The Licensee and Relevant Activity are being directed and managed in the UAE.
● The relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE.
● The Licensee has adequate people, premises, and expenditure in the UAE.
9. Do the Economic Substance Regulations only apply to UAE entities that are part of a foreign multinational group?
No, the Regulations impose all economic substance requirements on any UAE entity which carries on any Relevant Activity, regardless of whether the UAE entity belongs to a foreign multinational group.
However, a UAE based Distribution Business, Service center Business, Headquarter Business, or High-Risk IP Business would only be within the scope of the Economic Substance Regulations Dubai if the UAE entity transacts with foreign group companies. Distribution, Service center, headquarters, and High-Risk IP activities and transactions between UAE entities are not subject to the Economic Substance Regulations.
10. Is a company registered under an ‘offshore’ free zone company regime subject to the Economic Substance Regulations Dubai?
Yes, a company is registered as an offshore free zone company regime and is subject to the Economic Substance Regulations Dubai if that ‘offshore’ company undertakes a Relevant Activity under its list of works.