Economic Substance Regulations in the UAE

The economic substance regulations applies to covered UAE licensees engaged in RA

• Purchasing from a Foreign Connected Person and importing and storing in UAE
• Providing services to Foreign Connected Persons in connection with a business outside UAE

D&SC Core Income-Generating Activities:

• Transporting and storing component parts, materials or goods ready for sale
  Managing inventories
• Taking orders
• Providing consulting or other administrative services

Foreign Connected Person:
Connected Person that is not a resident or deemed as resident in UAE

• Management: Companies in UAE must be “adequately” managed and directed from the UAE;
• Income: Income generating activity related to the RA should be undertaken in the UAE. It is pertinent to note that the list of Core Income Generating Activities as per Article 5 of ES Law (CIGA) are inclusive in nature; and
• Other administrative aspects:
  • Adequate number of qualified employees
  • Adequate physical assets
  • Annual expenditure in the UAE

The Regulations apply to financial years starting on or after 1 January 2019

• Report whether the UAE company satisfies the Economic Substance Test must be submitted with the assigned Regulatory Authority
• The Economic Substance report must be submitted with the specified Regulatory Authority within 12 months after the end of the financial year. The first such report is therefore due on 31 December 2020
• Regulatory Authority will then submit a report to the competent authority i.e. the UAE Ministry of Finance and may be shared with competent authorities of overseas jurisdictions

• Failure to meet economic substance in UAE:
  • Financial year 1 – AED 10,000 – 50,000
  • Subsequent financial years AED 50,000 – 3,00,000
• Administrative penalty of AED 10,000 – 50,000 for failure to provide information or furnishing inaccurate information

All covered UAE businesses have the right to appeal against liability for administrative penal consequences and the amount of penalty – To be detailed in a resolution to be released by the UAE Government

• Value and type of income and operating expenses related to each RA;
• Location of the business and physical assets deployed to conduct the RA;
• Number of employees, their qualifications and the number of people responsible for conducting the Relevant Activity;
• Evidence that decision making takes place within UAE;
• Ownership related details;
• Special information with regard to intellectual property; and 
• Declaration stating that the corporate has met the economic substance requirements.

* Free zone/ Financial Free Zone authorities are also Regulatory Authority(ies) for all Relevant Activity(ies)

• Authorities given the power to initiate audits 6 years from the end of the FY in which the report is filed – details and records to be maintained over the said period
• Authorities given the Power to Enter Business Premises and Examine Business Documents – requirements of prior notice for entering not mentioned – surprise checks may require ongoing compliance
• Regulatory Authority may suspend, revoke, or refuse the renewal of the License – could lead to major business disruption

• Outsourcing of RA: Level of controls and supervision of outsourced activity needs to be checked
• Branches, representative offices which do not have a board must ensure that manager/director is physically present in the UAE during decisions concerning administration or operation
• Companies which carry out intellectual property related activities are subject to additional obligations
• Holding companies are subject to less extensive requirements and may satisfy the economic substance requirements if they fulfil the requirements for the submission of data and information to the competent authority, and if they have sufficient staff and premises to carry out the work of a holding company.

• Internal review: Review documents/ contracts/ financials;
• Check for RA: Assess whether the business is engaged in any relevant activity. If so, conduct an analysis whether it meets or will reasonably meet economic substance criteria for a financial year and subsequent financial years;
• Impact assessment: Identify gaps and conduct impact assessment of the Regulations on its business;
• Decision making: Take remedial measures either through process changes or business restructuring; and
• Compliance: Understand the reporting requirements and ensure compliance

Note: Further guidance is respect of Economic Substance Regulations.