Economic Substance Advisory

Why Has The UAE Introduced Economic Substance Regulations?

The UAE introduced Economic Substance Regulations to honor the UAE’s commitment as a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS), and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist).
The Regulations ensure that UAE entities that undertake certain activities are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE. The Regulations are effective from 1 January 2019, and apply to financial years starting on or after 1 January 2019.

What Is Economic Substance Regulation In UAE?

The Economic Substance Test requires a Licensee to demonstrate that: the Licensee and Relevant Activity are being directed and managed in the UAE; the relevant Core Income Generating Activities (“CIGAs”) are being conducted in the UAE; and The entity will need to be directed and managed in the jurisdiction with regards to the relevant activity & The entity will need to have an adequate number of qualified employees, incur adequate expenditure in the jurisdiction proportionate to the level of activity and have adequate physical presence in the jurisdiction (e.g. office space, facilities, etc.).

Who Is Subject To These Regulations?

The regulations set out a reporting framework that applies to companies and/or licensees carrying out “Relevant Activities”. These activities are listed as follows:
  1. Banking Business
  2. Insurance Business
  3. Investment Fund management Business
  4. Lease – Finance Business
  5. Headquarters Business
  6. Shipping Business
  7. Holding Company Business
  8. Intellectual property Business (“IP”)
  9. Distribution and Service Centre Business