UAE economic substance

From 1 January 2019, UAE-registered companies (including offshore and free zone entities) engaged in and generating income from ‘Relevant Activities’ must i) maintain economic substance in the UAE and annually submit ii) an economic substance notification and iii) an economic substance report to the UAE authorities.

  • What are Relevant Activities?

    • UAE companies engaged in the following activities must meet economic substance requirements (ESRs):
      • Holding companies;
      • Headquarters;
      • Intellectual property;
      • Investment fund management;
      • Lease – finance business;
      • Shipping;
      • Banking;
      • Insurance;
      • Distribution and service centres.
    • A definition on each activity above can be found on the Ministry of Finance ESR page.
  • What economic substance requirements must I meet?

    • Economic substance requirements vary depending on the type of Relevant Activity. For example, holding companies have lower reporting obligations than a high-risk intellectual property (IP) business. Refer to Article 5 of this Ministerial Decision for sector-specific guidelines;
    • In general, a UAE company has economic substance if:
      • It conducts income-generating activities in the UAE;
      • It is managed and controlled from the UAE i e the board of directors is present in UAE when making business decisions;
      • It rents a physical office space in the UAE;
      • It either has full-time employees in the UAE or a local supplier to conduct the main business activities from the UAE;
    • Companies that conduct more than one ‘Relevant Activity’ must meet ESRs for each activity.
  • What information should I provide to the UAE Government?

    • Every UAE-registered company conducting a Relevant Activity must annually submit a notification through the Ministry of Finance portal. This notification is to be submitted within 6 months of the company’s financial year end;
    • In addition, should these UAE companies have earned income from a Relevant Activity, an additional report must be submitted within 12 months of its financial year end;
    • This report must contain the following information:
      • The type of ‘Relevant Activity’ in which the company is engaged;
      • The main income-generating activity;
      • The value and type of income and operating expenses and assets related to that ‘Relevant Activity’;
      • The place of business, property or equipment used to carry out the ‘Relevant Activity’;
      • The number of full-time employees;
      • Declaration of whether the company has met the requirements of the Economic Substance Test.
    • Additional information must be provided for those entities carrying out a high-risk intellectual property business or outsourcing their Relevant Activity to third parties.
    • UAE companies not conducting any Relevant Activity are neither required to file the Notification nor the Report.
    • The template of this Notification and Report can be found on the Ministry of Finance webpage.
  • What happens if I do not meet the economic substance requirements or I supply inaccurate information?

    • The UAE Ministry of Finance and/or the UAE Federal Tax Authority may share our Client’s business and personal information to the foreign government in the country where the entity is incorporated, or where the parent company or ultimate beneficial owner are resident;
    • Administrative penalties (of up to Dhs400,000) and/or potential suspension, revocation or non-renewal of the business/trade licence may also apply.
  • Are there any exemptions available?

    • Yes, exemptions apply to i) UAE companies tax-resident outside the UAE ii) investment funds iii) UAE entities 100% owned by a UAE resident that are not part of a multinational group, and that only carry out business activities in the UAE iv) UAE branches of a foreign company if the relevant income of the branch is subject to tax in the foreign jurisdiction;
    • UAE companies majority-owned by the UAE government are no longer exceptions to the ESRs;

Conclusion

Healy Consultants Group PLC can i) advise our Clients on how these changes affect their business and ii) assist our Clients’ companies fulfil all UAE ESR obligations, including notification filings.

Contact us

For additional information on our company registration services in UAE, please contact our in-house country expert, Ms. Chrissi Zamora, directly:
client relationship officer - Chrissi