Guide For UAE Economic Substance Regulations
- May 18, 2020
- Posted by: kgrnaudit
- Category: advisory
Does the Regulations only apply to UAE entities that are part of a foreign multinational group, or that are owned by a foreign shareholder?
No. The Regulations impose economic substance requirements on any UAE entity which carries on a Relevant Activity, regardless of whether the UAE entity belongs to a foreign multinational group. However, a UAE based Distribution Business, Service Centre Business, Headquarter Business or High-Risk IP Business would only be within the scope of the Regulations if the UAE entity transacts with a foreign group companies. Distribution, Service Centre, Headquarter and High-Risk IP activities where transactions between UAE entities are not subject to economic substance requirements.
Is a company registered under an ‘offshore’ free zone company regime subject to the Regulations?
Yes, if the ‘offshore’ company undertakes a Relevant Activity.
Do the activities listed on the commercial license determine whether a Licensee undertakes a Relevant Activity?
No. Whilst the commercial license may indeed state the Relevant Activity, a ‘substance over form’ approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the Regulations. This means looking beyond what is stated on the commercial license to the activities actually undertaken by the Licensee during a financial period.
Who is exempt from the Regulations?
Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE Government body or authority, are exempt from the Regulations.
What if a Licensee does not undertake a Relevant Activity during a financial period?
If a Licensee does not undertake a Relevant Activity during a financial period, it does not need to meet the Economic Substance Test. The Licensee would not be required to notify (see question 38) its Regulatory Authority or submit an Economic Substance Return (see question 39) for the relevant financial period.
What if a Licensee undertakes a Relevant Activity, but does not earn any income from that activity during a financial period?
A Licensee that undertakes a Relevant Activity but that does not earn income from this activity in a financial period is not required to meet the Economic Substance Test for that period. Whilst the Licensee would still need to submit a notification with its Regulatory Authority, it is not required to file an Economic Substance Return for the relevant financial period.
If all income from the Relevant Activity is earned from outside the UAE, is the Licensee exempt from the Regulations?
No, this Licensee is not exempt from the Regulations. Income from a Relevant Activity for which the Licensee needs to demonstrate economic substance in the UAE includes all income, including income that is generated by the Licensee outside of the UAE.
What is “adequate” or “appropriate” economic substance?
The UAE acknowledges that businesses vary in size and nature, and what is adequate and appropriate will depend on the nature and level of activities carried out, and the level of income earned by the Licensee. The regulations and Guidance therefore do not provide a “minimum” standard for what is considered “adequate” or “appropriate”. The Regulatory Authorities are expected to take a pragmatic approach when assessing whether a Licensee has met the Economic Substance Test, recognising that the type and level of activity of a Licensee may fluctuate during the course of a financial period and from year to year.
Will economic substance be assessed on a Licensee by Licensee basis, or can Licensees that are part of the same group elect to be assessed on a ‘consolidated’ basis?
No. The Regulations do not allow Licensees that are part of the same group to be aggregated for economic substance purposes. Each Licensee will need to comply with the Regulations, and demonstrate economic substance on an individual basis.That being said, relevant economic substance (staff, functions, assets, etc.) maintained in the UAE by other group companies can be taken into account if that economic substance is made available to the Licensee under a service / outsourcing type arrangement (see question 21).
Does a Licensee need to hold board meetings in the UAE?
Yes, an adequate number of board meetings should be held in the UAE. What is considered to be an adequate number of board meetings will depend on the nature and extent of the Relevant Activity being undertaken by the Licensee. For each board meeting held in the UAE:
● a quorum of directors must be physically present in the UAE; and
● meeting minutes must be maintained and signed in the UAE; and
● directors attending the board meeting must have the necessary skills and expertise to discharge their fiduciary duties. A Holding Company Business is not required to be directed and managed in the UAE, except where this is a requirement of the relevant licensing authority.
Do employees who perform the CIGAs need to be resident in the UAE?
Employees who perform the CIGAs of a Licensee would in principle need to be resident in the UAE. Non-resident employees or other persons would count towards the economic substance of a Licensee in the UAE only if (i) the relevant activities are performed while the individual is physically present in the UAE, and under the direction of the Licensee and (ii) the Licensee bears the relevant costs of the non-resident individual.
Do the directors of the Licensee need to be resident in the UAE?
No, directors only need to be physically present in the UAE to attend relevant board meetings of the Licensee.
Can directors be counted as employees?
Yes, directors who in addition to performing their fiduciary duties also perform CIGAs can be counted as employees of the Licensee for the purposes of meeting the Economic Substance Test.
Is having a UAE Tax Residency Certificate for a financial period proof of meeting the Economic Substance Test for that relevant period?
No, whilst obtaining a UAE Tax Residency Certificate requires certain minimum presence in the UAE, a UAE Tax Residency Certificate in itself is not proof of a Licensee having adequate economic substance in the UAE in relation to is Relevant Activity and the income earned from this activity.
What can a Licensee outsource?
A Licensee can outsource any or all of its CIGAs so long as the outsourced activities are performed in the UAE. Effectively, this means that a Licensee can use UAE based (i) employees and (ii) physical assets (including premises) of third parties or related entities to satisfy the Economic Substance Test. A Licensee cannot outsource “directed and managed”, as the Licensee is required to demonstrate oversight and control of its Relevant Activity in the UAE.
To whom can a Licensee outsource?
A Licensee can outsource, contract or delegate CIGAs to related parties or to third party service providers, as long as the Licensee monitors and retains the ability to control the outsourced activities.
What should a Licensee do under an outsourcing arrangement?
A Licensee should:
● Have adequate supervision of the outsourced activity; and
● Ensure the outsourced activity is conducted in the UAE; and
● Ensure the outsourcing provider has adequate substance in the UAE; and
● Ensure there is no double counting of the outsourcing providers resources. The above can be evidenced through contractual agreements that govern the relationship and responsibilities of each party.
Can a Licensee outsource any of its activities to a foreign person?
Activities that are not CIGAs (e.g. back office functions) can be outsourced to related parties or third party service providers that are located outside the UAE without adversely impacting the economic substance of the Licensee in the UAE.
For Enquiries Contact KGRN Team
Managing Partner – Gopu Rama Naidu
E-mail : firstname.lastname@example.org. Ph: +971 455 70204