How do economic substance regulations in the Dubai affect your business?


How do economic substance regulations in the UAE affect your business?

Brief summary and Background:

The Economic Substance Regulations in Dubai, UAE were brought into effect on April 30, 2019 by Resolution number 31 of 2019.

The Regulations shall apply to all the Companies carrying out relevant activities as listed including the free zone Companies.

The Regulations are with a view to comply to the EU regulations to curb harmful tax practices.

The motive behind Economic Substance Regulations in Dubai, Abu Dhabi, Sharjah, UAE:

EU has stated that these regulations are in co-ordination with the standards for good practices and to encourage Corporate Governance:

  • These Regulations which involve sharing of information leads to transparency in the Country
  • They also lead to levying of taxes appropriately
  • Reporting by the Countries are in parlance with the Organisation for Economic Cooperation and Development (OECD) guidelines.

What will be the scenario in case of outsourcing these requirements?

A Company can outsource the Core Income Generating Activities (CIGA’s) subject to the following:

  • The ability to control still remains with the Company
  • The activities have to be performed in Dubai

This means that the Company cannot just rely on outsourcing as the control has to remain with the company itself.

It may however be noted that the activities which are not Core Income Generating Activities (CIGA’s) can be operated outside Dubai keeping in view that no impact should be on the economic substance regulations.

Relevant Business Activities in detail:

  • Distribution and Service Centre Business: 

This includes purchase of materials from an outside country, bringing them to the Dubai and then distributes them to an outside UAE Country.

Impact of Economic Substance in Dubai, UAE: These requirements are applicable only to those entities whose main business is Distribution and Service Centre Business. Other Entities may also resort to purchase of goods for their ordinary functioning, the regulations shall not apply to them to avoid duplicity.

  • Holding Company Business:

A Holding Company is a Company which holds interest in other Companies and earns dividends or capital gains out of it.

Impact of Economic Substance: Holding Company Business is subject to the regulation however in a minimal manner i.e. having major employees in the Dubai, to be managed in Dubai, adequate expenditure in the Dubai.

  • Intellectual Property (IP Business):

A licensee is considered a High risk IP if the criteria as led down are met.

Impact of Economic Substance: The following needs to be done to be considered Economic Substance Test Compliant:

– Full time employees with relevant qualifications working in Dubai and also residing in Dubai.

– Decision making process should be carried out in Dubai.

 – Disclosure as to why they are holding the IP in the Dubai.

  • Lease finance business

A lease finance business is basically providing any assets or any other equipment to someone in exchange of money. It carries out leasing in its ordinary course of business.

Impact of Economic Substance: The Regulations shall apply to the above mentioned activities; however they shall not apply to anyone who carries out leasing without exchanging the money as a form of Consideration.

  • Headquarter Business: 

A headquarter business is where an entity provides services to another entity and also ensures the overall growth of that particular entity.

Impact of Economic Substance: The entities engaged in this form of business have to comply with the economic regulation test and provide the disclosures as required and prescribed under the regulation.

  • Investment Fund Management Business:

An entity that provides investment management services to entities in Dubai or outside Dubai are subject to the regulations.

Impact of Economic Substance: The entities engaged in this form of business have to comply with the economic regulation test and provide the disclosures as required and prescribed under the regulation.

Impact on reporting regulations in Dubai, Abu Dhabi, Sharjah, UAE:

  • Reporting shall be done by way of annual reporting.
  • Failure of such reporting may incur penalties which shall be financial in nature
  • There will be high level disclosures to be given by the company namely :
  1. Figures of the income generated, and profits earned.
  2. The expenditures incurred in Dubai.
  3. Details of place where the business activities are carried out.
  4. Detailed disclosures of the employees i.e. names, numbers, qualifications, experience, durations etc.
  5. Detailed financial statements and disclosures thereof.
  6. Holding of Board meetings with adequate quorum in the Dubai and preparation of minutes thereof

The penalties for non-compliance are ranging to AED 50,000 ($13,600). Hence a Company is advisable to follow the guidelines and if not on its own then by of outsourcing the same.

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