Introduction of Economic Substance Rules in the UAE
11

Sep 2019

The UAE Cabinet has taken an essential step on 30th April, 2019, where the Cabinet of Ministers Resolution No. 31 of 2019 has been released, which stands as a milestone for the UAE Taxation policy and can be considered as an essential step when it comes to global alignment regarding the Economic Substance (ES) in the UAE with Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Sharing (BEPS) directives. This move has got relevant impact on the business activities when dealing with the economic front. This guide will give you a complete idea on it.

What is Economic Substance Rule?

Introduced by the tax haven countries, the economic substance rules stand as guidelines issued by the EU as well as OECD. These rules get implemented to all legal entities that stand as residents for the tax purpose. Since the implementation of these rules has come into effect for the United Arab Emirates on April 30th, 2019, there will be subsequent changes in the business entities.

Eligibility Criteria to Implement Economic Substance Rules

There are specific requirements which need to be met by the business entities to apply the regulations. Some of the core rules are stated below:

  • The business entities must conduct income-generating activities in the premises
  • The entity should be directed and managed in UAE
  • There should be an adequate number of full-time employees in the UAE
  • A sufficient amount of expenditure needs to occur in the operating activities of the business
  • The company must have an appropriate amount of physical assets in the UAE
  • Additional requirements get applied if the business entity deals with high-end IP related services

Impact of Economic Substance Rules in Different Domains

The UAE is known as a well-destined business destination that grabs the attention of millions of foreign expats to come forward and set up their business. Now, the implementation of the economic substance rule gets applicable to the UAE onshore and offshore companies. Certain business domains that fall into the category are stated below:

  • Banking
  • Insurance
  • Fund Management
  • Lease-finance
  • Headquarters
  • Shipping
  • Holding Company
  • Intellectual Property
  • Distribution and Service Centre

Reporting Requirements for Business Entities

The reporting requirements essential for Business entities are stated below:

Business Entities

Rules to be Applied

Existing Business Entities

Must comply with the Regulations from 30th April 2019, with the first return due in 2020

New Business Entities

Must abide by with the Regulations upon receiving its trade license, with the first return due in 2020 (or later)

 

In short, you can see that the step of introducing the economic substance rule has brought a significant change in the business entities, which is unavoidable. It is recommended to have a word with accounting and audit experts as they hold a better clarity on this. JAXA Chartered Accountants stands as one of the DAFZA and JAFZA approved auditors who have been helping multiple clients across the UAE with the relevant accounting and auditing needs. Our experts are well-versed with the new laws with the legal proceedings and can guide you accordingly. If you hold any query, do contact us today-we’d be glad to assist.