An Introduction to UAE’s Economic Substance
Recently, the UAE government launched an initiative known as ‘Resolution No. 31 of 2019.’ This resolution requires all institutions foreign and domestic that conduct business in the region to demonstrate ‘economic substance.’ Companies within this scope must comply or face significant penalties, cancellations, and suspensions of business licenses. But what exactly is ‘economic substance?’
The term refers to an obligation for an entity to have a physical-economic presence in the jurisdiction in which it was formed. It sets forth a set of rules that ensure all business transactions are associated with business substance, meaning that onshore, offshore, and free zone businesses conducting certain business activities must demonstrate their actual profits compared to their economic presence in their jurisdiction.
The Definition of Economic Substance
The definition of economic substance originates from the Center of Harmful Tax Practices from within the Organization for Economic Cooperation and Development. This organization sets the standards for the nation, ensuring that businesses are not registering within the country solely for tax purposes. Companies that operate in banking, lease financing, insurance, shipping, distribution centers, and more are all subject to this screening process and must pay business taxes in Dubai. The criteria for businesses to meet are:
• Businesses should be owned and controlled from within the UAE
• Organizations taking part in this must carry out CIGA activities
• All Entities must have a sufficient number of adequately trained employees, equipment, and operating costs.
Why has the UAE Introduced the Economic Substance Resolution?
In 2019, the European Union released a list of non-cooperative tax jurisdictions in the UAE for not meeting its compliance obligations with the EU. The UAE has adopted a series of new regulations to bring the nation in line. As a result, Resolution No. 31 of 2019 was introduced.
What Industries are Subject to These Laws?
The rules set out by the Economic Substance Resolution cover all mainland businesses and all businesses operating in the Dubai Free Zones. Additionally, companies incorporated under offshore jurisdictions that carry out a related activity are subject to these rules. However, entities that are directly or indirectly operated by the UAE government are expressly omitted from these resolutions.
Economic Substance Requirements
Businesses affected by the economic substance resolution are obligated to:
• Conduct effective income-generating operations within the nation
• Be located, focused, and controlled from within the Emirates
• Employ a substantial number of full-time staff in the UAE
• Own physical assets within the UAE
• Incur operational costs in the UAE
• Organizations that solely operate in the holding firm market will be subject to less stringent criteria.
Businesses encompassed by the Economic Substance Resolution must disclose reports on their relevant operations annually to the appropriate government authority. Failure to adhere to these requirements can result in administrative penalties, business license suspensions, and even outright cancellation.
Economic Substance in the UAE
Emirati-based companies can file and refile Economic Substance Resolution reports through the Ministry of Finance’s (MoF) dedicated online portal. This process is mandatory within a year of the licensee’s financial year. Recently, the MoF debuted models for these upcoming reports. These reports include:
• Both divisions of a licensee involved with a related business practice
• The parent company must report, including the licensee’s top shareholders
• A confirmation that license owners follow the criteria of a ‘restricted licensee’ under current economic substance regulations.
• Owners of a business license in Dubai must clarify why CIGAs, or Core Income Group Activities, have not been carried out in the UAE.
• These same CIGAs are used for the prototype for all future operations
• Licensees are expected to submit accounting details surrounding their profits and losses for the operations in question.
• Statements must be attached along with the submitted information
• Licensees must establish which of their businesses are their primary operation.
• Detailed information regarding any outsourced companies
• Licenses must contain paperwork and any evidence supporting the existence of economic substance.
Additionally, there have been ongoing amendments to economic substance regulations. These revisions are expected to address existing classifications and align them with new, improved ones.
MSZ Consultancy is Your Solution for Adhering to Economic Substance Regulations
Staying on top of the litany of business regulations in the UAE is a full-time job in itself. To keep up with ever-changing business laws, you need the expertise of business setup consultants like MSZ Consultancy. We have years of experience helping businesses navigate UAE business practices and make the most of their investments. From managing business taxes in Dubai to professional license applications, we have a talented team of consultants that can get the job done.
Whether you’re a single foreign investor making their way in the UAE market or part of a large corporate platform, our consultant experts can help you streamline your business. Let us help you manage the critical day-to-day tasks such as renewals and visa applications so that you can get back to what matters most- running your business. We’re here to help you maximize your profits while minimizing the red tape. Give us a call today at +971 52 544 1248, and let us help your business and investments transcend into something greater.