Economic substance regulations were introduced in the UAE in April 2019 under Cabinet Resolution no. 31/2019. The UAE introduced the Economic Substance Regulations to honor its commitment as a member of the Organization for Economic Co-operation and Development (OECD) on harmful tax practices, an all-inclusive framework of OECD on Base Erosion and Profit Shifting (BEPS).
The purpose of the Regulations is to ensure that UAE entities undertaking certain activities report actual profits that are proportionate with the economic activity undertaken within the UAE.
The Regulations primarily apply to all legal entities onshore, offshore, and free zone companies that carry out a ‘Relevant Activity’. The Relevant Activities under the Economic Substance Regulations are listed as below:
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquarters Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Centre Businesses
The provisions of the Regulations shall not apply to Companies in which the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital. The regulations apply to all the entities starting from 1 January 2019 and need to start submitting to their respective regulatory authorities and prepare and submit to the same Regulatory Authority an economic substance declaration within 12 months from the end of their relevant financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). DIFC entities are required to submit in the DIFC Client Portal.
The notification needs to be submitted to the relevant authority the business is licensed in, the requirements of this notification also depends on the respective licensing authority. Failure to abide by the regulations may result in hefty fines.