UAE Economic Substance Regulations

The United Arab Emirates Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019, that requires all in-scope UAE entities to maintain an economic substance. Further clarification on the application of the Regulations was issued on 11 September 2019. The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” to maintain an adequate “economic presence” in the UAE relative to the activities they undertake. As of every time, the country has selected those “Relevant Activities” in the region and that are directly involved in the boom of the economy of the country, to have economic viability for steady and stable growth of the same. Even though such strict regulations have been implemented, the resolution clearly states exemptions for certain category. The provisions of the Regulations shall not apply to Companies in which the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital. This shows the desire of the state to ensure the stability of the economy directly by intervening in the system but not affecting the same and necessitating healthy competition which can cater for the growth.

The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are governed by the Regulations will need to submit a notification to their Regulatory Authority (defined under Cabinet Decision No (58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards, and prepare and submit to the same Regulatory Authority an economic substance declaration  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). An entity is not required to meet the economic substance test and file an economic substance declaration for any financial period in which it has not earned income from a Relevant Activity. Failure by an entity to comply with the Regulations shall result in administrative penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and potential suspension, revocation, or non-renewal of its registration.

For Example:

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

1: A UAE company with 1 January 2019 – 31 December 2019 financial year: First assessable period would be 1 January 2019 – 31 December 2019.

2: A UAE company with 1 April 2019 – 31 March 2020 financial year: First assessable period would be 1 April 2019 – 31 March 2020. No need to comply with the Regulations for the period 1 January 2019 – 31 March 2019.

 

Relevant Activities under Economic Substance Regulation

All the business in the UAE does not come under the Economic Substance Regulation. The following are the relevant activities comes under the Economic Substance Regulation in UAE.

  • 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

What we can offer: 

If your business entity falls under above-mentioned activities, you might require to advise on Economic Substance Regulation. Nex Consultants can cater our services includes. 

  • Providing advice on understanding of the new substance requirements applicable in UAE
  • Conducting study and analysis the effect of the economic substance regulations on business
  • Providing advice on relevant compliances under the UAE economic substance regulations.
  • Provide preliminary assessments on business entity/company
  • Economic Substance Regulation (ESR) filling with concern authorities

NEX Consultants offers an efficient and effective service on UAE Economic Substance Regulations to your entity to gain clarity on their status, supported by detailed analysis and tailored solutions prescribed by our experts.