Why these new Regulations?
The introduction of the Regulations follows successive decisions of the European Union (EU) to include the UAE on a list of non-cooperative jurisdictions for tax purposes, and illustrates the ongoing efforts of the country to fulfill all the EU’s requirements and the highest international standards on taxation including the OECD’s requirements.
What are the Regulations about?
- is directed and managed in the UAE;
- with reference to the level of activities performed in the UAE, has adequate people, premises and expenditure in the country;
- conducts the relevant “core income generating activities” (or “CIGA”) in the country.
What is the scope of the Regulations?
The substance requirements apply to all UAE companies, including those incorporated in Free Zones, that generates incomes from one of the Relevant Activities listed below:
- banking business
- finance and leasing business
- fund management business
- headquarters business
- holding company business
- insurance business
- intellectual property business
- shipping business
- distribution and service centre business
A company is not required to pass the economic substance test if it does not generate income in relation to a relevant activity that it carries.
What does it mean in practice?
“Directed and managed in the UAE”
The Regulations contain specific requirements on how a company has to be “directed and managed” in the UAE. These concern e.g. the number of board meetings being held in the country, the composition and competence of the board of directors, the record of the minutes of all board meetings.
“Adequate employees, expenditure, physical assets”
What is adequate for each company will be dependent on the particular facts of the company and its business activity. A company will have to ensure it maintains and retains appropriate records to demonstrate the adequacy of the resources utilized and expenditure.
“CIGA”
Another requirement necessary to meet the economic substance test is for the UAE company to conduct its CIGA in the UAE. To demonstrate substance, the company will not have to perform all of the listed CIGA but only the ones that are relevant in its situation.
“Reporting requirements”
A Relevant Entity will be required to report certain information on its Relevant Activities on an annual basis to the authority that issued the trade license to the Relevant Entity. Existing companies will have to comply from 20 April 2019 onwards, with the first return due in 2020.
“Outsourcing permitted”
For all core requirements introduced by the law, Outsourcing is permitted; the company may satisfy the economic substance test if it retains a UAE-based service provider and outsources all or part of the requirements to it.
“Sanctions for non-compliance”
If the company registered in the UAE does not meet the economic substance test, it is liable to significant financial penalties for non-compliance, and ultimately, a deregistration.
Besides the fines, the Regulations provide that the authorities may exchange information about non-compliant UAE-registered companies with the tax authorities in the states where their holding companies and UBO’s are resident.
How can we help you?
M/HQ is on hand to help you get a clear understanding of the new substance requirements possibly applying to your company.
Ensuring that your company complies with its administrative and statutory responsibilities can be cumbersome. Outsourcing this function to M/HQ enables you comply with your obligations and to focus on what you do best – manage your operation and grow your business.
We provide a full range of corporate secretarial services (CSS) for all types of UAE establishments [to learn more, see our fact sheet “Corporate Secretarial Services – Available Packages”] and are happy to discuss your company’s specific needs in depth in light of the new Regulations, helping you find the most cost and time effective solution to meet your administrative and statutory compliance responsibilities.