In 2020, the United Arab Emirates finalized their economic substance directive as part of their commitment to the OECD’s Inclusive Framework and in response to an assessment conducted by the European Union’s Group on Business Taxation. The regulation outlines that all companies – foreign and domestic – involved in specific income-generating activities during the financial year beginning January 1, 2019, must maintain and demonstrate adequate economic presence in the UAE relevant to the activities they are undertaking. The regulation applies to entities located federally and within the country’s free zones.
The scope of this regulation impacts the following business operations in the country:
- 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
Entities that fall within the scope of this regulation must satisfy a substance test and are required to submit an annual report of these activities to the country’s Federal Tax Authority. To demonstrate adequate substance:
- The entity and relevant activity must be directed and managed in the UAE
- The relevant core income-generating activities are conducted in the UAE
- The entity has adequate people, premises, and expenditure in the UAE
In the case that no income is generated from relevant activities during a financial year, the entity is still required to submit a Notification Form to the local authorities. However, for any period in which income has been generated from activities outside of the above-listed activities or are subject to an exemption, entities need not submit a substance report or notification.
Failure to comply with the economic substance rules can result in penalties ranging from AED 20,000 and up to AED 400,000, as well as incur other administrative sanctions such as the suspension, revocation, or non-renewal of the entity’s trade license or permit.
For more information on complying with the UAE’s Economic Substance requirements and ensuring the compliance of your international entities, contact a CT representative at (844) 322-6993 (toll-free U.S.).