The UAE issued economic substance regulations (the “Regulations”) in April 2019, amended by Cabinet Resolution No.57 of 2020 in August 2020, which introduced a requirement for UAE entities to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.
The UAE economic substance requirements apply to all UAE onshore and free zone companies and certain other business forms that undertake one or more “Relevant Activity” for financial years commencing on or after 1 January 2019.
Entities that meet the requirements to be treated as “exempt” do not need to demonstrate economic presence in the UAE. However, such entities are required to file a Notification and provide sufficient evidence to support their exempt status
The introduction of economic substance requirements brings the UAE in line with other jurisdictions that have recently issued economic substance legislation (e.g. Cayman Islands, Bermuda, etc.), and affirms the UAE’s commitment to addressing concerns around the shifting of profits derived from certain mobile business activities to “no or nominal tax jurisdictions” without corresponding local economic activities.
UAE entities will need to assess whether and which of their activities fall within the scope of the economic substance regulations, and how to ensure they meet the economic substance requirements in respect of each Relevant Activity. This is both a qualitative and quantitative assessment that would involve consideration of operational, financial, tax / transfer pricing, legal and governance matters.
UAE entities undertaking and earning income from a Relevant Activity in a financial year must perform the related “Core Income Generating Activities” in the UAE by demonstrating that:
It is possible for an entity to carry on more than one Relevant Activity at a time, in which case generally the economic substance requirements will need to be satisfied for each Relevant Activity.
Different economic substance requirements apply depending on the Relevant Activity carried on. For example, pure holding companies are subject to less stringent economic substance requirements, but additional economic substance requirements apply to “high risk” IP related activities.
Must comply with the regulations from the beginning of their financial year end commencing on or after 1 January 2019, with the first report due 12 months after their financial year end (likely being 31 December 2020 in many cases)
Must comply with the regulations from the commencement of their financial year, with the first report due 12 months after their financial year end.
In addition to exchanging information with foreign authorities, failure to comply would result in administrative penalties of AED 50,000 in the first year of failure, increased to AED 400,000 in the subsequent consecutive year(s) of failure, subject to a six-year limitation period. Additional penalties such as suspending, revoking or not renewing the UAE entity’s trade licence could also apply.
As a leading provider of assurance, tax, legal and business consulting services in the UAE, PwC is ideally placed to help you in determining whether the UAE substance regulations apply to your business / entities, and how to ensure you can demonstrate the required economic substance in the UAE.
Need help preparing for the filing of your Economic Substance Report in advance of your actual submission? Use our free PwC Economic Substance Reporting (ESR) Tool to:
Fully visualise your proposed responses to the questions in the Economic Substance Report in a pdf format, allowing you to understand and get internal approvals in advance of the formal completion of your Report on the Ministry of Finance’s portal that will go live in December;
Understand in advance what information and supporting documentation you will need to submit/upload; and
Identify gaps and possible areas of risk in terms of meeting the Economic Substance Tests for your entity(ies) using our prop methodologies and databases/information.
Director, Middle East FATCA/CRS Leader, PwC Middle East
Tel: +971 (0)54 793 4271
Legal Leader | Head of Corporate, PwC Legal Middle East
Tel: +971 (0) 4 304 3309