Economic substance rules in the UAE: still the best, but up to a point
In order not to be blacklisted by the EU for non-compliance with the requirements of the BEPS Action Plan, the UAE was forced to adopt the Normative Act on Economic Presence. Act #31 was taken on April 30, 2019.
So, what are the main requirements for Economic Substance?
First, let us define to whom it may concern.
The new Act applies to all business legal structures in the UAE, which carry out income-generating activities through one of the Relevant Activities, listed as follows:
- Investment funds management;
- Distribution and service activities;
- Headquarter services for a group of companies;
- Holding company;
- Intellectual property;
The minimum standards of the BEPS Action Plan regulate on how a legal entity should comply with the Economic Substance requirements. Let's take these requirements apart. It's good to mention that even minor non-compliance leads to the imposition of serious fines and sanctions, described below.
To meet the significant Economic Substance terms, a legal entity must pass the test. Therefore, it's crucial to examine all the details and the nature of the test.
1. Core income-generating activities in the UAE.
The test is passed if the business activity meets the list of Relevant Activities, it is carried out in the UAE, and the core income-generating items are one of the below mentioned:
Core income-generating items
|Investment fund management||
|Finance and leasing||
|Head office services: managinga group of companies||
Providing the following activities to one group of companies:
|Service and distribution activities
(for a group of companies)
|Holding||Companies whose main object is the acquisition and holding of shares in other companies and which do not carry out commercial activities.|
|Intellectual property||Income possession, management, and generation from intellectual property, such as copyrights, patents, technical know-how, as well as non-trading intangible assets (including trademarks), branding, marketing, and distribution.|
2. Demonstration of management and control.
The test is passed when:
- The Company Board of Directors meetings are held in the UAE. They happen on schedule and as often as it is necessary following the level of the decisions made.
- The Quorum of directors is present in person.
- The Minutes are made in writing, and the directors present at the meeting sign the minutes.
- The Protocols of the Meetings fix the strategic decisions of the company.
- The directors have the necessary knowledge and experience to perform their duties.
- The minutes of the board and records are kept in the UAE jurisdiction
- If we are considering branches or representative offices of foreign companies or other commercial enterprises, that do not have a board of directors and are managed by a single manager, this manager must be present in person in the UAE, when making key decisions regarding the organization and management of such enterprises.
3. Proper employee and material assets costs.
The test is passed when the company:
- Has an adequate number of employees physically present in the UAE.
- Incurs an adequate amount of expenditure in the jurisdiction.
- Has an office space in proportionate quantity.
Pure holding companies should be considered separately.
Holding companies whose primary source of income is equity participation and gaining profits exclusively from dividends and capital gains, can pass the economic presence test under the follow-ing conditions:
- Compliance with the requirements for submission of documents, records, information to the appropriate regulatory body, following the current legislation applicable to the company in the UAE.
- The presence of a commensurate number of employees and the availability of premises to manage a holding company.
However, there is one catch: the provisions do not apply to holding companies, which raise revenues not through dividends and capital gains, but any other source.
Act 31: compliance.
The act requires companies to notify the regulatory body of the following annually:
1. Whether or not the company carries out Related Activities.
2. Whether the whole or any part of the Company gross income is subject to tax in a jurisdiction outside the UAE, the company still shall provide the Regulatory Authority with the documentation and information required to be submitted in compliance with the Law in place
3. When the financial year is considered over in the Company.
The fiscal year is the annual reporting period of the company, provided by the constituent documents.
Fines and sanctions.
The most unpleasant part relates to penalties that will follow as a result of failures or violations of the norms and requirements of Act No. 31, namely:
- the company has not passed the test for economic presence;
- the company does not provide information;
- the company provides incorrect information.
When first addressing the issue of non-compliance with the requirements for economic presence, a fine of not less than AED 10,000 but not exceeding AED 50,000 may be imposed.
The fine shall be increased to an amount not less than AED 50,000 but not exceeding AED 300,000 in the subsequent year if the company fails to pass the test again.
The regulatory body reserves the right to impose additional penalties such as suspending, revoking or not renewing the UAE Relevant Entity’s trade license.
The above indicates that the UAE is very serious about remaining on the white list of jurisdictions for international business, even at the cost of former attractiveness.
But is it that bad?
We strongly believe that the new rules have changed the way of doing business, but the benefits of the UAE as a jurisdiction for conducting international business remain the same. All the company needs is a solution to Act-31-problem.
What are the business opportunities in the light of new legislative requirements?
- A company may terminate an activity or change it so that it no longer falls under the provisions of the Relevant Activity.;
- Or it can continue working in the UAE within the framework of the Relevant Activity.
This can be achieved in two ways
The first solutionis to rent an office and recruit employees.
Advantages should be present somewhere, but they are vague and hard to be found.
Disadvantages are clear: very specific requirements for employee qualifications, remote monitoring of operational processes and very high costs.
The second solutionis to find a trusted partner like AC Business Expert DMCC.
It is good to know, that to demonstrate appropriate expenses for employees and tangible assets, the company may outsource its Relevant Activity to the third-party service providers under the follow-ing conditions:
- the company is able to demonstrate adequate supervision of the outsources activity;
- the outsourced activity is carried out in the UAE;
- the outsourcing provider has its own Economic Substance in the UAE, which cannot be double-counted with outsourcing services offered to other companies.
Thus, AC Business Expert DMCC (ACBE) offers a full package, which includes classification, legal opinion, economic presence in the jurisdiction, submission of annual reports or any other information to the regulatory body.
Some additional details on what we offer:
|Classification||Classification of the company||The Customer fills out an ACBE application form. Based on the information provided, ACBE prepares a resolution that will determine whether the company activities are within the scope of the law|
|Legal opinion||Attestation and provision of a legal opinion from a lawyer or auditor of the UAE||Legal portfolio review and legal opinion, as well as consultation on a suitable solution within the framework of the economic presence in the UAE|
|Economic presence in the jurisdiction||Outsourcing and employment solutions for directors and staff, office premises provision||ACBE has its own office in the UAE and can provide jurisdictional solutions, including directors, office space, employees and other similar services as outsourced|
|Submission of annual reports or any other information to the regulatory body||Registration of company status in the regulatory authority||ACBE registers the status of the client’s company with the local regulatory authority|
The Advantages you get:
- all the requirements of the Economic Substance are satisfied competently;
- your business operations have higher cost-efficiency comparing to self-managed Economic Substance;
- your business process is not affected;
The disadvantages you have to deal with:
The costs are higher than running a business without foreign jurisdiction
Apparently, since any option now incurs extra costs, you need to choose yours, because things will never be the same again.
But if you would like to get some clarifications or discuss interesting questions with us, we are always open!
Just email us!