The New Regulations introduce new requirements for entities carrying out certain economic activities within the United Arab Emirates (“UAE”).
In accordance with the New Regulations, entities holding an existing trade license must comply with them from 30 April 2019 (with the first return due in 2020), while entities receiving their trade license on or after 30 April 2019 will be bound by the New Regulations upon receiving their trade license (with the first return due in 2020 or later).
The purported aim of the New Regulations is to provide tax transparency, in an effort to mitigate base erosion and profit shifting and to ultimately remove the UAE from the EU and Organisation for Economic Co-operation and Development's list of non-cooperative tax jurisdictions.
When did the New Regulations become effective?
The New Regulations came into effect as of 30 April 2019.
Which economic activities are subject to the New Regulations?
The New Regulations apply to all UAE onshore and free zone entities carrying out any of the following economic activities or status: (i) banking; (ii) insurance; (iii) investment fund management; (iv) lease-finance; (v) headquarters; (vi) shipping; (vii) holding companies; (viii) intellectual property related businesses; and (ix) distribution and service centers (the "Relevant Activities").
Entities carrying out any of the Relevant Activities, which are directly or indirectly, owned by any government authority or body, are beyond the scope of the New Regulations.
What are the economic substance requirements?
In order for an entity to satisfy the economic substance requirements, it shall: (i) conduct its core income generating activity in the UAE; (ii) be directly managed in the UAE in relation to that activity (i.e. its Board of Directors meet and pass resolutions in a quorate manner, frequently in the UAE,; (iii) have an adequate number of full-time employees based in the UAE; (iv) incur an adequate amount of operating expenditure in the UAE; and (v) have adequate physical assets in the UAE.
Holding companies, whose main activity is restricted to solely possessing shares or other assets, are subject to less rigorous economic substance requirements.
What are the reporting requirements?
Companies will be required to disclose certain information regarding their economic activities to the Regulatory Authority (defined as an authority delegated by the Cabinet of Ministers to regulate a Relevant Activity) annually. In the event of an entity conducting any Relevant Activities, it will be required to prepare and submit a detailed report to the Regulatory Authority along with a declaration as to whether or not the entity satisfies the economic substance requirements.
What offences and penalties may be imposed for non-compliance?
Businesses which fail to comply with the New Regulations may be subject to administrative penalties of up to fifty thousand dirhams (AED 50,000) in the first year and three hundred thousand dirhams (AED 300,000) in any subsequent year. Other penalties may include the suspension, revocation or non-renewal of the entity’s trade or commercial license.
Following the enactment of the New Regulations, it is anticipated that multinational companies which undertake Relevant Activities will be impacted. Entities in the UAE which are obliged to but which do not satisfy the economic substance test are encouraged to take appropriate action.
Clients are encouraged to conduct a comprehensive analysis of their existing business models and management structures, in order to formulate an action plan to remediate potential issues and ensure compliance with the New Regulations.