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UAE: Economic Substance Rules

How it is going to impact your business?

The United Arab Emirates (UAE) released the Cabinet of Ministers Resolution n. 31 of 2019 with effect from 30 April 2019, concerning the Regulations for Economic Substance in the UAE. The introduction of the new Economic Substance rules is a milestone for the UAE’s tax policy and an important step towards its alignment with the global Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) directives.

In May 2018, the UAE joined the OECD Inclusive Framework on BEPS and committed to introduce the minimum standards by the end of 2018.

The purpose of the Economic Substance rules is to bring specific requirements for businesses to demonstrate the actual economic activity in the country and the basis to support that the incorporation in the UAE was not driven solely to benefit from the privileged tax regime.

The UAE Economic Substance rules are broadly similar to the regulations introduced by other countries with similar tax environment as they follow the guidance issued by the European Union and OECD. Essentially, the economic substance test is based on the three common key pillars that businesses need to comply with:

  • Company should be directed and managed from the UAE;

  • Core Income Generating Activity related to the activities covered by the ES rules should be undertaken in the UAE;

  • Adequate number of qualified employees, office space and annual expenditures in the UAE.

The following are considered as “Relevant Activities” under the Regulations:

  • Banking

  • Insurance

  • Fund management

  • Lease-finance

  • Headquarters

  • Shipping

  • Holding company

  • Intellectual property (IP)

  • Distribution and service centre

The Regulations apply to all UAE onshore and free zone companies that carry on a “Relevant Activity”. It is yet to be confirmed whether the Regulations will also apply to sole proprietorships and branches, but we expect entities incorporated under offshore (free zone) companies regulations that carry on a “Relevant Activity” to be within the scope of the Regulations.

Entities that are directly or indirectly owned by the UAE government (both federal and local) are specifically excluded from the Regulations. On this basis, UAE sovereign investment funds and other UAE government related entities would not need to meet the UAE economic substance.

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Balaram Vuchidi

Managing Director
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