What’s new?
On 22 September 2019, the RAK International Corporate Centre (RAKICC) released its guidance document (the “Guidance”) regarding the Economic Substance Regulations (“ESR”) introduced earlier this year – Click here to see our previous articles on the subject:
Key take-aways
The Guidance ratifies certain key aspects of the scope and application of the regulations with respect to RAK ICC entities:
- The vast majority of RAK ICC companies have a financial year ending on 31 December, and will be required to provide information by 31 December 2020.
- RAK ICC will set out the requirements for submitting the notifications (on whether or not a RAK ICC company falls under the ESR scope) by 1 January 2020.
- RAK ICC will request companies that conduct a Relevant Activity to demonstrate how they satisfy their economic substance – (i) demonstration on how the company conducts its CIGA in the UAE; (ii) the extent to which the company is directed and managed in the UAE; (iii) confirmation that the company has adequate number of qualified full-time employees in the UAE, incurs an adequate amount of operating expenditure in the UAE, and has adequate physical assets in the UAE.
- Pure equity holding companies will be subject to less stringent economic substance requirements. A company will not be considered “holding company” for the purposes of ESR if it derives income from sources other than dividend and capital gains (e.g. companies which hold real state, bonds, securities and etc.)
- For companies relying on outsourcing arrangements, RAK ICC will be required to validate that there are adequate and appropriate resources available to meet the outsourcing requirements vis-à-vis ESR.
- RAK ICC company not generating an income from operating in a Relevant Activity will not be subject to meeting substance requirements. However, the company’s Registered Agent must submit a notification to RAK ICC confirming this status.
- A company that fails to comply with ESR will face penalties that may range from AED 10,000 to AED 300,000, as well as administrative actions including suspension or strike-off of the company.
What’s next?
ESR took effect on 30 April 2019. There are a number of actions which relevant Licensees must be undertaking to ensure compliance – from clarifying their entity classification, to the structuring of contractual and delegation arrangements, the review and organization of their internal governance, their employment and premises arrangements and the capturing of relevant business information which will be required for the preparation and filing of reporting information to the Regulatory Authority.
Even entities not deploying a Relevant Activity should implement proper corporate governance mechanisms in order to avoid any risk of failing the Economic Substance Test.
If you operate a business in the UAE or hold shares in a UAE structure, we highly recommend that you take an active role in auditing your corporate arrangements with the view to bring in the necessary level of corporate substance.