Economic Substance Regulation of UAE

January 8, 2020

INTRODUCTION AND BACKGROUND H.H. Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai has promulgated the Resolution of the Cabinet of Ministers No. (31) for 2019 concerning Economic Substance Regulations (ESR/Regulations) on 30 April 2019. Pursuant to the Regulations,  a Ministerial Decision no. 215  of 2019 on the Issuance of Directives for the Implementation on the Provisions of Cabinet Decision no. 31 of 2019 Concerning Economic Substance Requirements was issued on 11 September 2019 as a guidance ( Guidance) on how the Economic Substance can be applied and how the Economic Substance Test may be met for the purpose of complying with the ESR . The Economic Substance Regulations shall apply to UAE onshore, Free Zone and offshore companies that operate and generate income from the “Relevant Activities”. WHAT IS ECONOMIC SUBSTANCE REGULATION (ESR)? Background of the ESR: On 1 December 1997, the European Union (EU) adopted a resolution on a code of conduct for business taxation with the objective to curb harmful tax competition.  Shortly thereafter, the Code of Conduct Group on Business Taxation (COCG) was set up to assess tax measures and regimes that may fall within the scope of the Code of Conduct on Business Taxation. On 5 December 2017, the COCG published the (first) EU list of non-cooperative jurisdictions for tax purposes, in cooperation with the Economic and Financial Affairs Council (ECOFIN). Recently, the world economy has been characterized by a shift from country-specific businesses to global enterprises operating both over the internet and at locations remote from where their physical customers are buying goods and services on online. This has presented opportunities for complex profit repatriation structures – reducing the tax burden in other words – and has fuelled concerns of unfair and unethical practice. As such, EU formalize and applies three listing criteria, which are aligned with international standards and reflect the good governance standards that the Member States comply with themselves: Transparency: Jurisdictions should comply with the international standards on exchange of information, automatic and on request. In addition, jurisdictions should sign the OECD’s (The Organization for Economic Cooperation and Development) multilateral convention or signed bilateral agreements with all EU Member States to facilitate such exchange. Fair Tax Competition: Jurisdictions should not have harmful tax regimes nor facilitate offshore structures which attract profits without real economic activity. BEPS Implementation: Jurisdictions should commit to implementing the OECD’s Base Erosion and Profit Shifting (BEPS) minimum standards, starting with Country-by-Country Reporting The common denominator for the Economic Substance systems is The Organization for Economic Cooperation and Development (OECD) Forum on Harmful Tax Practices (FHTP), which sets the global standard that requires companies to have substantial activities in a jurisdiction (known as “Economic Substance”). OECD is a unique forum where the governments of 36 member states with market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and sustainable development.  Over 125 jurisdictions around the world are members of the OECD BEPS Inclusive Framework. The FHTP is a sub-body of the Inclusive Framework and is responsible for assessing […]

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