Corporate Structuring Update: UAE amends Economic Substance Regulations

On 10 August 2020, the UAE issued an amended economic substance regulation which brings a number of key changes that multinational corporations, financial institutions, investment funds, and family offices will need to comply with, retrospectively. Importantly, natural persons, sole proprietors, trusts and foundations no longer fall within the scope of the economic substance regulation.

The new regulation was issues pursuant to the Cabinet of Ministers Resolution No. 57 of 2020 (“New Economic Substance Regulation”), which replaced the initial economic substance regulation issued under Cabinet of Ministers Resolution No. 31 of 2019. Subsequently, on 19 August 2020, the Ministry of Finance has also issued an updated guidance on the New Economic Substance Regulation pursuant to the Ministerial Decision No. 100 of 2020 (“New Guidance”) and an updated set of FAQs.

The New Economic Substance Regulation is retrospectively applicable to UAE entities from financial years starting on or after 1 January 2019.

Key Changes in the New Economic Substance Regulation

The key changes in the New Economic Substance Regulation and New Guidance include:

(a) Definition of licensee: The New Economic Substance Regulation only applies to (i) juridical persons (persons with separate legal personality); and (ii) unincorporated partnerships, registered in the UAE and carry on a relevant activity in the UAE.

Therefore, natural persons, sole proprietors, trusts and foundations no longer fall within the scope of the New Economic Substance Regulation.

(b) Introduction of “exempted licensee” category: Entities directly or indirectly owned at least 51% by the UAE government are no longer exempt. A new exempt licensee category has been introduced which includes a licensee that is:

  • an investment fund;
  • tax resident outside the UAE;
  • wholly owned by UAE residents and (i) is not part of a multinational group; and (ii) only carries out business in the UAE; and
  • licensee that is a branch of a foreign entity whose relevant income is subject to tax in a jurisdiction other than the UAE.

(c) Confirmation that branches are an extension of their “head office”: Head office and branches are considered to be a part of the same legal entity and therefore, a head office can submit a single consolidated notification and economic substance report.

However, a UAE branch of a foreign entity that carries out a relevant activity would be required to comply with the New Economic Substance Regulation as if it was a separate legal person, unless the relevant income of the branch is subject to tax in the jurisdiction of the foreign head office.

(d) Amendments to the definition of relevant activities: The definition of “distribution and service centre business” has been expanded and there is no longer a requirement (i) for the goods to be imported and stored in the UAE and (ii) for the services to be provided in connection with a business outside the UAE, for an entity to be considered a “distribution and service centre business”.

Further, the scope of a high-risk intellectual property licensee has been restricted.

(e) Re-submission of economic substance notification: Licensees that have already submitted the economic substance notification directly to their regulatory authorities are required to re-submit a notification at the UAE Ministry of Finance’s portal once available.

(f) Economic Substance Report: The licensees are now required to provide financial reports as part of the economic substance report submission.

(g) Introduction of National Assessing Authority: The Federal Tax Authority (FTA) has become the “National Assessing Authority” to manage and oversee the compliance and enforcement. The role of the Regulatory Authorities will be limited to the collection of information from licensees and reporting of such information to the FTA.

How does it affect you?

Multinational corporations, financial institutions, investment funds, and family offices will now need to comply with the new substance requirements introduced by the New Economic Substance Regulation. Penalties will be imposed for non-compliance with the requirements of the New Economic Substance Regulation.

What should you do next?

Under the regime, the licensee and exempted licensee must submit the notification electronically on the Ministry of Finance Portal within six months from the end of their financial year end. The related economic substance reports will need to be uploaded within 12 months following the end of their financial year end, hence, the first economic substance reports will be due by 31 December 2020 for the financial year ended 31 December 2019.

It is critical for businesses in the UAE to commence preparations immediately, re-assess their UAE position under the New Economic Substance Regulation and consider whether any restructuring of its business operations should be undertaken to satisfy the economic substance test. The failure to comply with statutory economic substance obligations under the New Economic Substance Regulation has serious consequences and may result in the suspension / revocation of license and administrative penalties ranging from AED 20,000 to AED 400,000.

How can we help?

As the leading law firm in MENA, and with strong corporate structuring and tax expertise and significant corporate structuring and tax experience across all industry sectors in the region, Al Tamimi & Company is well placed to assess the impact of the recently introduced Regulations on your organisation and assist you to comply with the new Regulations.

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