In response to an evaluation of the United Arab Emirates’ tax framework by the European Union Code of Conduct Group on Business Taxation, the United Arab Emirates (UAE) issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), also known as the “Regulations,” on April 30, 2019. This was done as part of the UAE’s commitment to being a member of the inclusive framework of the Organisation for Economic Cooperation and Development (OECD). It was decided to introduce this law in order to cut down on illegal tax methods and other wrongdoings that occur within the corporate community. The implementation of this rule will put an end to the improper tax techniques that are utilised in international company. Additionally, it will guarantee that the appropriate amount of taxes is paid by the companies in the countries in which the ultimate beneficial owner is domiciled.
These regulations are applicable to all businesses, whether established onshore or in a free zone, and certain other business forms that carry out any of the defined ‘‘core income-generating activities (CIGA)” listed below:
- 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 center business
To meet the economic substance requirement, companies will generally get to satisfy the subsequent three tests:
- The corporate should be directed and managed in the UAE for the specific activity.
- The company’s CIGA should be performed in the UAE.
- The company should have an adequate level of qualified employees, premises and annual operating expenditures.
Major impacts of ESR on businesses
The UAE government has implemented ESR regulations whose deadlines are coming very near. The Economic Substance Regulations will have a great impact on the companies within the United Arab Emirates. The impact will include the following:
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Reporting obligations
Each noon is required to provide annual or bi-annual “economic substance return” specifying how the entity complied with substance rules. As the implementation date of the various economic substance laws in some of the noons was 1 January 2019, the reporting obligations relating to compliance with the economic substance rules for entities incorporated prior to 1 January 2019 is as early as 1 July 2019 in some of this noon.
The noon entities are required to submit the following details while filing the obligations:
- Business/incomes types
- Amount and type of gross income
- Amount of operating expenditure
- Details of premises
- Number of qualified employees, including experience levels, employment terms, qualifications, and period of employment
- Details of CIGA’s (for each economic activity conducted)
- Financial statements
- Details of outsourced CIGA’s (if applicable)
- Business plans, especially relating to reasons for holding intellectual property in the noon
Penalties for non-compliance
If the company fails to comply with ESR requirements, then a penalty will be imposed on it. The amount of the penalties are determined by the economic substance laws of the company and is not uniform.
Liquidations and deregistration of companies
If the company repeatedly does not comply with the Economic Substance Regulations or continuously fails in providing the relevant information, then the entity’s license may not be renewed, or in some cases, the entity may have to go through with the liquidation of the company. This will have a great influence on the economy of the country.
Transparent tax information
The implementation of ESR will force the entity to use the legal and correct method of doing business. As a result, the entities will have to provide correct financial information and may have to pay additional taxes.
Contact KGRN for any queries or support on ESR
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