Economic substance test for UAE company

[humus]

If I open a UAE FZCO with one director cum shareholder. and the director only visits UAE twice a year, to keep the residence visa active. Will the economic substance test fail? I mean it should, because the core income generating activities (CIGA) are being conducted by the director outside the UAE, simply because he is outside most of the year.

@Fred used to mention, that being in the uae twice a year, to maintain the residence visa should be sufficient. But that will certainly fail the economic substance test, if more time is not spent in the uae. Do you guys have any opinion about this?

 

[Ancova]

I would strongly advise to visit the ESR website and contact them directly. Even the free zones are not allowed to give any information about this.

 

[Martin Everson]

Do you guys have any opinion about this?

It depends if your business activity is subject to UAE's ESR rules. And if so then clearly what you are doing does NOT meet any form of economic substance if Director/shareholder is only in UAE a couple of days of the year and all activity is done outside the UAE.

You can find more below anyway.

https://mof.gov.ae/economic-substance-regulations/

 

[Ancova]

It depends if your business activity is subject to UAE's ESR rules. And if so then clearly what you are doing does NOT meet any form of economic substance if Director/shareholder is only in UAE a couple of days of the year and all activity is done outside the UAE.

You can find more below anyway.

https://mof.gov.ae/economic-substance-regulations/

100% true but as a former employee of a free zone, I urge you to contact the government directly and ask, you do not want do anything wrong here

 

[humus]

It depends if your business activity is subject to UAE's ESR rules. And if so then clearly what you are doing does NOT meet any form of economic substance if Director/shareholder is only in UAE a couple of days of the year and all activity is done outside the UAE.

You can find more below anyway.

https://mof.gov.ae/economic-substance-regulations/

Does the sale of Software products (online) fall under Distribution & Service centre business?

 

[Martin Everson]

Does the sale of Software products (online) fall under Distribution & Service centre business?

View attachment 5276

You will need to seek professional legal advice there or at least speak to an accountant there and get something in writing. Even if they end up giving you wrong information just keep something in writing either way to protect yourself.

 

[bigbite100]

sorry for the stupid question - why should there be a substance test and who should do it? what happens if this is failed?

 

[Ancova]

Relevant Activities:

• Banking Business
• Insurance Business
• Investment Fund management Business
• Lease – Finance Business
• Headquarters Business
• Shipping Business
• Holding Company Business
• Intellectual property Business (“IP”)
• Distribution and Service Center Business

 

[Martin Everson]

sorry for the stupid question - why should there be a substance test and who should do it?

To avoid shell companies and unfair tax advantages by companies using low tax jurisdictions to obtain a benefit with no tangle substance in that jurisdiction. You should it also.

what happens if this is failed?

--- quote start

The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority , and complete and submit to the same Regulatory Authority an Economic Substance Report within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the Economic Substance Test and file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt. A Notification form will need to be submitted regardless. Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), as well as other administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.

---- quote end

Also if you fail meet ESR then the below happens.

Twelve no/low tax countries share data on companies with no substance with UBO's country

Since March 2021 twelve countries now automatically share information on companies with no economic substance and where beneficial owners are non-resident. I think non-resident folk with companies in the below countries may be in for a letter from their tax man. Anguilla Bahamas Bahrain...

www.offshorecorptalk.com

P.S Just make sure your activity as I mentioned is not subject to ESR rules .

 

[Fred]

@Fred used to mention, that being in the uae twice a year, to maintain the residence visa should be sufficient. But that will certainly fail the economic substance test, if more time is not spent in the uae. Do you guys have any opinion about this?

There is a misunderstanding / misinterpretation of the ESR here.

As mentioned earlier here already almost no one ever qualifies for the relevant activities for the ESR.