Have you filed your Economic Substance Regulation notification? All Licensees in the UAE must “notify” by the 30th June deadline and certain businesses engaged in “relevant activities” must further report.
By Vida Grace and Suneer Kumar/members of the corporate and commercial practice group at Al Suwaidi & Company PURPOSE The purpose of the Regulations is to ensure that UAE entities that undertake certain activities are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE. The rules of Economic Substance Regulations are broadly similar to the regulations introduced by other countries with similar tax environment (i.e. no or only nominal tax), as they follow the guidance issued and the global standard developed by the European Union (EU) and OECD. REQUIREMENT FOR ECONOMIC SUBSTANCE TEST For each financial period in which a Licensee earns income from a Relevant Activity, it will need to meet an Economic Substance Test in relation to that activity. In addition to an annual notification requirement, Licensees that undertake and earn income from a Relevant Activity are also required to file an Economic Substance Return within 12 months from the end of the relevant financial period. The Economic Substance Test requires a Licensee to demonstrate the following tests: Direction and Management Test “Licensee is directed and managed in the UAE in relation to that Relevant Activity” (Article 6 (2) (b) of the Regulations) Core Income Generating Activities (CIGA) Test That the core income-generating activities of the Relevant Activity are being conducted in the UAE. Adequacy Test – the License has the following: Adequate employees – pertaining to a number of qualified full -time employees who are physically present in the UAE. If outsourced, then adequate level of expenditure on outsourcing to a third party. Employee can either be employed by the Licensee, third party, or via temporary contract. Adequate level of operating expenditure incurred by the Licensee in the UAE Adequate physical assets in the UAE FIRST REPORTABLE FINANCIAL YEAR The first assessable period for a UAE company with 1 January 2019 – 31 December 2019 financial year, would be 1 January 2019 – 31 December 2019. The first assessable period for a UAE company with 1 April 2019 – 31 March 2020 financial year, would be 1 April 2019 – 31 March 2020. There is no need to comply with the Regulations for the period 1 January 2019 – 31 March 2019. SCOPE OF THE REGULATIONS The scope of the Regulations requires that where the “Licensee earns income from a Relevant Activity, they must have Economic Substance in UAE and they need to satisfy Economic Substance Test, notify and report to relevant authority”. The provisions of this Resolution shall not apply to any commercial company which is the Government of the State, or the Government of any Emirate of the State, or any governmental authority or body of any of them has any direct or indirect ownership in its share capital. WHAT RELEVANT ACTIVITIES ARE CAUGHT BY THE LEGISLATION? Relevant Activity are the following: the below listing is not exhaustive and that the list “includes the activities listed but is not limited to them.” Article 5 of the Regulations further states that the below “are regarded to be the most important activities that a Licensee carrying out a Relevant Activity […]Read more