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Economic Substance Regulations In UAE

The UAE Cabinet recently issued the Cabinet of Ministers Resolution No.31 of 2019, which requires all in-scope UAE entities to maintain an economic substance. This will be applicable to onshore and free zone companies that engage in certain “Relevant Activities”.<br /> Ever since the introduction of economic substance regulations in UAE, people have been raising queries about numerous things related to it. Here we have listed below a set of questions and answers about economic substance regulations in UAE.

  1. Reportable Financial Year. The Regulations apply to financial years starting on or after 1 January 2019. For a UAE entity with 1 January 2019 – 31 December 2019 financial year, the first assessable period would be the same time period and for an entity with 1 April, 2019 – 31 March 2020 financial year, the first assessable period would be 1 April 2019 – 31 March 2020.
  2. UAE Economic substance regulation will be applicable to companies that engage in any of the below mentioned “Relevant Activities”;
    • Banking Businesses
    • Insurance Businesses
    • Investment Fund Management Businesses
    • Lease-Finance Businesses
    • Headquarter Businesses
    • Shipping Businesses
    • Holding Company Businesses
    • Intellectual Property Businesses
    • Distribution and Service Centre Businesses
  3. Economic substance test. A Licensee meets the Economic Substance Test in relation to a Relevant Activity in the following cases:
    1. If the Licensee conducts State Core Income-Generating Activity in the State.
    2. If the Licensee is directed and managed in the State in relation to that activity, provided the Licensee’s board of directors meets in the State at an adequate frequency having regard to the amount of decision-making required at that level.
    3. Having regard to the level of Relevant Activity, if there is an adequate number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third-party service providers, whose activities, employees, expenditure, and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
    4. If there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third-party service providers whose activities, employees, expenditure and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
    5. If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third-party service providers in the State, for the activities of the Licensee;
    6. In the case of State Core, Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.
  4. Economic substance requirements will be applicable to all entities that engage in relevant activities irrespective of the fact whether they belong to a foreign multinational group or not
  5. offshore companies that undertake relevant activities are subject to economic substance regulations.
  6. Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE Government body or authority need not comply with the economic substance regulations.

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