A Guide to the Economic Substance Test in the United Arab Emirates
As per the UAE Cabinet of Ministers Resolution No.31 of 2019, the UAE companies that carry out relevant activities are required to meet the UAE economic substance test. The regulations cover the companies including onshore, and free zone companies that carry out the relevant activities. However, the companies owned by the UAE government (federal & local) directly or indirectly have been exempted from the economic substance requirement. The introduction of the Economic Substance Regulations (ESR) shows the UAE’s commitment towards addressing the issues of shifting of profits by the companies that have no real economic activities in the UAE.
UAE Economic Substance Relevant Activities
The relevant activities conducted by the companies (onshore, free zone or financial free zone) to generate earnings in the UAE under the ESR include the following:
- Banking
- Insurance
- Investment fund management
- Leasing and finance
- Headquarter Business
- Shipping
- Intellectual property Business
- Holding company business
- Distribution and service centres
However, a substance over form approach is undertaken to determine the relevant activity. This means that the focus is on the actual activity being undertaken rather than the activity stated on the commercial license.
For the comprehensive guide on relevant activities for UAE Economic Substance
Regulations, click here
How to Prepare for the UAE Economic Substance Test?
The UAE Companies that are engaged in any of the above relevant activities are required to adhere to the UAE economic substance test and they should:
- Conduct the Core Income-Generating Activity (CIGA) in the UAE;
- Be directed and managed in the UAE;
- Have an adequate level of qualified full-time employees, operational expenditure and physical assets present in the UAE to conduct the CIGA
- Prepare and submit a compliance report to the regulatory authority which contains information in relation to compliance with the UAE Economic Substance Test
What is “Adequate” Economic substance?
Since the businesses vary in size and nature, the UAE takes into account the nature of the activity and the level of income earned by the licensee to determine the adequate economic substance. Therefore, the ESR guidance has not set a minimum standard for adequate or appropriate economic substance.
Will Economic Substance be Assessed on a ‘Consolidated’ Basis?
The Licensees that are part of the same group should demonstrate the economic substance individually. The regulations do not permit the economic substance to be assessed on a consolidated basis.
Does a Licensee Need to Hold Board Meetings in the UAE?
As per the regulations, the Licensee is required to conduct board meetings in the UAE. The minimum number of meetings required will be determined on the basis of the nature and level of the Relevant Activity. The Licensee has to meet the following conditions for the board meetings:
- The directors must be physically present in the UAE
- The minutes of the meeting need to be maintained and signed in the UAE
Do Employees Who Perform the CIGAs Need to be Resident in the UAE?
As per the regulations, the employees of the UAE companies who conduct the CIGAs of the Licensee is required to be a resident in the UAE. However, under certain circumstances, the non-resident employees will also be counted in relation to the economic substance of the Licensee. The following are the conditions:
- The relevant activities should be conducted when the individual is physically present in the UAE, under the supervision of the Licensee
- The Licensee is responsible for the costs of the non-resident employee
Do the Directors of the Licensee Need to be Resident in the UAE?
It is not mandatory for the directors to be a resident in the UAE for economic substance purpose. However, the physical presence of the directors in the UAE is mandatory during the board meetings of the Licensee.
Can Directors be Considered as Employees?
The directors can be considered as employees if they perform the CIGAs along with their fiduciary duties, for the purpose of the UAE Economic Substance Test.
Can a Licensee Use the UAE Tax Residency Certificate as Proof of Meeting the UAE Economic Substance Test?
The regulations don’t allow the Licensee to use the UAE Tax Residency Certificate as proof to show that the Licensee is having an adequate economic presence in the UAE. This is because the process of obtaining a Tax Residency Certificate requires a minimum period of presence in the UAE.
Seek Help From Auditing Companies in the UAE
The companies in the UAE, be it onshore, free zone or financial free zones, need to meet the adequate economic substance requirements and to conduct an annual compliance report. The companies need to follow the specific guidelines to comply with the ESR requirements. The companies may be under pressure to ensure that they are complying with the ESR and it is here that an efficient Chartered Accountants firm like Jitendra Chartered Accountants (JCA) comes handy for the companies that perform the relevant activities in the UAE. JCA’s highly efficient Chartered Accountants are well-versed in the new rules, regulations and guidelines regarding the ESR and can help the companies in complying with the UAE Economic Substance Test.