UAE - Economic Substance Regulations

Overview

On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”), requiring all in-scope UAE entities (“Relevant Entities”) that carry on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE from 30 April 2019.

Who is subject to the Regulations

The Regulations apply to all UAE onshore and free zone companies that carry on a "Relevant Activity". It is yet to be confirmed whether the Regulations will also apply to sole proprietorships and branches, but we expect entities incorporated under offshore (free zone) companies regulations that carry on a “Relevant Activity” to be within the scope of the Regulations.

Entities that are directly or indirectly owned by the UAE government (both federal and local) are specifically excluded from the Regulations. On this basis, UAE sovereign investment funds and other UAE government related entities would not need to meet the UAE economic substance requirements.

The following are considered as “Relevant Activities” under the Regulations:

• Banking

• Insurance

• Fund management

• Lease-finance

• Headquarters

• Shipping

• Holding company

• Intellectual property (IP)

• Distribution and service centre

The Economic Substance Test

1) The ‘Directed and Managed’ Test: The entity will need to be directed and managed in the UAE with regards to the relevant activity (for example: frequent board meetings, quorum of directors physically present, minutes of all board meetings kept in the country, etc.)

2) The ‘Core Income Generating Activities (CIGA)’ Test: The entity that performs any of the relevant activities for the purpose of the ES rules will need to demonstrate that the relevant CIGAs have been undertaken in the Bahrain. The criteria for the CIGA Test vary depending on the relevant activity in question.

3) The ‘Adequate’ Test: The entity will need to have an adequate number of qualified employees in the UAE, incur adequate expenditure in the jurisdiction and have adequate physical presence in the country. The applicability of the ‘Adequate’ test will be dependent of the particular facts and should vary on a case by case basis. The UAE regulations foresee that a guidance will be issued to clarify any expression or concept covered by the law, including the meaning of ‘adequate’.

Reporting requirements

Reporting of certain information on the Relevant Activities to the relevant regulatory authority (being the authority that issued the trade licence to the Relevant Entity).

When to file?

Existing entities must report on an annual basis with the first return due in 2020.

What are the consequences?

Administrative penalties (not less than AED 10,000 but not exceeding AED 50,000 in the first year, increased to an amount not less than AED 50,000 but not exceeding AED 300,000 in the subsequent year), subject to a six-year limitation period. Additional penalties such as suspending, revoking or not renewing the UAE Relevant Entity’s trade licence could also apply.

How we can assist you?

1. Impact assessment

Assessing which entities and activities are within the scope of the economic substance rules. This is a critical first step for all Bahrain businesses to determine what to notify to the Regulatory Authorities, and what economic substance requirements need to be met.

2. Gap analysis and action plan

Undertake a gap analysis that maps the current (operational) substance and corporate governance infrastructure against what is required under the regulations

3. Reporting

Assisting you in the preparation and submission of your annual notifications and economic substance declarations to the Regulatory Authorities.