The regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “ Relevant Activities†to maintain adequate economic pressure in the UAE relative to the activities they undertake. The Economic substance rules in UAE were introduced in April 2019, and businesses need to assess how they comply with those rules and regulations.
1. What are the relevant activities that are captured under the Economic Substance Regulations?
Below are the activities that have been defined by the Forum of Harmful Tax Practices (FHTP) as the relevant activities that will fall under the Economic Substance Regulations
♦Banking Business
♦Insurance Business
♦Investment Fund management business
♦Lease – Finance business
♦Headquarters business
♦Shipping Business
♦Holding Company business
♦Intellectual property business
♦Distribution and Service Centre Business
2. What are the businesses that will be exempted from the Economic Substance Regulations?
The provisions of the regulations will not apply to the companies in which the Federal Government of the UAE or the Government of any emirate of the UAE, or any government authority or body or any of them has at least 51% direct or indirect ownership in their share capital.
3. What does it mean to be subject to the regulations of the Economic Substance?
In every financial year, when a business earns income from a Relevant Activity, it will be required to meet an economic substance test in relation to that particular relevant activity. Below are the economic substance requirements that the licensee needs to comply with in relation to the Economic substance test:
♦The licensee and the relevant activity are being directed and managed in the UAE.
♦The relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE.
♦The licensee has adequate employees, premises, and expenditure in the UAE
4. What is the first reportable financial year for economic substance regulations in the UAE and when to file the return for economic substance?
The regulations will apply to the financial year starting on or after 1 January 2019. The deadlines for the filing of the return have been announced by the various authorities and it would be 30th June 2020 for Ajman Free Zone and Ras Al Khaimah Economic Zone. There is a possibility that all other authorities will also be extending the deadlines and making it 30th June 2020.
5. Who needs to notify the regulatory authority?
All the licenses that undertake the relevant activity as mentioned under the Economic Substance Regulations in Dubai irrespective of whether the licensee qualifies for an exemption under the regulations or has earned income need to submit a simple notification with its regulatory authority.
6. What are the penalties for non-compliance with the Economic Substance Regulations?
If the licensee fails to comply with the regulations of the economic substance, then such licensee may face Penal Consequences. The penalty for non-compliance in the first year ranges from AED 10,000 to AED 50,000 and for subsequent non-compliance, the range extends from AED 50,000 to AED 3,00,000.
If the businesses and companies are falling under the entities that are mentioned in the Economic Substance Regulations as relevant activities, they should understand the applicability of the Economic Substance Regulations Service in Dubai and also analyses and determine the impact of this new implication in the UAE.
We at ARC Associates are a group of well-qualified professionals who are driven to work along your businesses to assist you further in understanding and determining the impact of Economic Substance Regulations in Dubai, Abu Dhabi, Sharjah, and all over in UAE.
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