United Arab Emirates: Economic Substance Rules

Martin Everson

HNWI Offshore Consultant
Business Angel
Mentor Group

21st August 2019 -

UAE Companies – How Your Business May Be Affected

If you are operating an onshore or offshore entity in a "no or only nominal tax jurisdiction" (referred to hereinafter as a "noon"), which amongst others, holds shares or licenses intellectual property and receives operational income from other jurisdictions this article should be important to you and you should make yourself aware of the content as your business may be materially affected by the newly introduced economic substance rules formulated by the European Union Code of Conduct Group on Business Taxation.

What are "Economic Substance Rules"

The European Union (EU), has implemented criteria with which jurisdictions with no or only nominal tax policies need to comply as part of the EU's efforts to promote economic inter-jurisdictional transparency and to restrict so-called "harmful tax competition" practices. Noons are required to eliminate the facilitation of structures or arrangements aimed at attracting profits that do not reflect real economic activity within that jurisdiction. Noons are required to promulgate appropriate legislation to ensure compliance with the EU's economic substance rules to avoid sanction by the EU.

To date the British Virgin Islands (BVI), Cayman Islands, Isle of Man, Jersey, Guernsey, Mauritius, Bahamas, Seychelles, Bermuda and now also the UAE have promulgated laws incorporating the EU's economic substance rules. As a result, entities incorporated in noons, conducting identified business activities need to show actual economic activity in the noon or face fines, penalties, possible de-registration and even liquidation of the entity by the noon's authorities.

Failure of a noon to comply with the EU's economic substance rules will and have resulted in the "blacklisting" of these non-compliant jurisdictions.

What is Economic Substance

For an entity to have economic substance an entity must display that it is directed and managed in the noon by directors with adequate experience and qualifications, and has, taking into account the level of income generated, the necessary premises, qualified staff, sufficient annual expenditure within the noon, and lastly, that the entity conducts certain defined core income generating activities (dependent on the business sector and activities of the entity) either by the entity itself within the noon or by appropriate service providers, either inside or outside the noon.

Economic Substance Rules vs Noons

The EU's criteria on economic substance were to be introduced by all noons by 1 January 2019. Noons that had not implemented required laws but that showed commitment to the implementation of economic substance laws were placed on a "grey-list" by the EU. Noons that did not show commitment and those that have subsequently not finalized their commitments have been placed on a "blacklist". The listing followed a screening processes by the EU relating to tax transparency, fair taxation and the implementation of anti-Base Erosion and Profit Shifting (BEPS) measures.

Inclusion on the EU "blacklist" would have negative repercussions for entities operating from non-compliant noons. Subject to the internal laws of the EU country in which the entity that is incorporated in a non-compliant noon is operating, the result of non-compliance by the noon may include the audit by the tax authorities in the EU countries in which the said entity has assets and/or operations of such as well as of payments being made to the noon; EU countries may impose higher withholding or other taxes on dividends, interest payment, royalty payments or service fees on these entities; certain tax exemptions on withholding taxes may be increased; and direct tax consequences may also be encountered such as the refusal of deductions against income of certain expenses by the entity in the said EU country. The EU may further impose restrictions or prohibitions on investment or financing into the "blacklisted" jurisdictions which may affect noon entities in non-compliant noons.

Economic Substance Rules in the UAE

As the UAE falls within the definition of a noon as a no or only nominal tax jurisdiction, the UAE has been obliged to promulgate the necessary laws to comply with the EU's economic substance rules. The UAE introduced its economic substance regulations by Cabinet of Ministers Resolution No. 31 of 2019, which was effective as of 30 April 2019 (the "Resolution"). These regulations regulating economic substance do not affect UAE entities that are owned and conduct their operations and receive income solely in and from the UAE.
UAE entities that are owned by entities incorporated in other noons would be affected by the economic substance laws of that noon, or if incorporated in a non-compliant noon, the UAE entity may be affected by such non-compliance as indicated hereinabove.
UAE entities operating outside or receive income from outside the UAE (including but not limited to dividends, royalties, license fees and management fees) are the target of the EU's economic substance rules and accordingly that of the Resolution. These UAE entities must in terms of the Resolution provide the UAE authorities proof of compliance with the EU's economic substance rules. UAE entities must show that they have economic substance in the UAE by (i) being managed and directed in the UAE, (ii) conduct core income generating activities within the UAE as may be required by the entity's particular business sector or activity, and (iii) have an adequacy of qualified staff, premises, expenditure and equipment in order to conduct the activity and that justifies the income received.
Each UAE entity shall, from a date to be determined by the relevant authority that will oversee this process (which is still to be determined), submit a report that will be used to confirm compliance with the aforementioned economic substance rules contained in the Resolution.

Failure to Comply with the Resolution

Disclosure to Foreign Authorities
Failure by a UAE entity to comply with the Resolution will result in the disclosure of such non-compliance to the relevant authorities of the foreign jurisdiction either where the parent company or the ultimate beneficial owner of the UAE entity is resident.
Penalties for Non-Compliance with Economic Substance Rules

In the event that a UAE entity is found to be non-compliant with the requirements of the provisions mentioned in (i), (ii) and (iii) in the third paragraph above, the relevant UAE authority may impose an administrative penalty of between AED10,000 and AED50,000 for the first year of default with these penalties for repeated failure reaching up to AED300,000.

Failure to Submit Return or Give Accurate Information
In the event that a UAE entity fails to submit a return in compliance with the Resolution or gives inaccurate information therein, the relevant UAE authority may impose an administrative penalty of up to AED50,000.
 

ram74

New Member
Dear All,

This is my first post on this forum.

Do you think that the new UAE rules apply also on offshore companies?

If I’m not mistaken the offshore companies are not allowed to have any kind of substance in the UAE, apart from a bank account.

Do you think it’s still worth to keep them active just to hold bank account or to act as an holding company?
 

Martin Everson

HNWI Offshore Consultant
Business Angel
Mentor Group
Do you think that the new UAE rules apply also on offshore companies?
The first sentence in most post says a lot. You also need to consider CFC rules which makes these companies pointless for tax purposes for non-residents of UAE.

If I’m not mistaken the offshore companies are not allowed to have any kind of substance in the UAE, apart from a bank account.
No substance in UAE then your taxed in country where the center of activity and management control takes place. This has been standard practice for a while now.

Do you think it’s still worth to keep them active just to hold bank account or to act as an holding company?
A UAE offshore company for a non-resident is pointless for tax purposes. Any country with CFC rules will tax it so why bother.
 

ram74

New Member
Thanks Martin for your support.

Being EU citizen resident but not domiciled in Malta do you think that it make sense to keep the company up and running? I just use very rarely for some consulting.

The main purpose is to hold assets.
 

Martin Everson

HNWI Offshore Consultant
Business Angel
Mentor Group
Thanks Martin for your support.

Being EU citizen resident but not domiciled in Malta do you think that it make sense to keep the company up and running? I just use very rarely for some consulting.

The main purpose is to hold assets.
Thats very expensive setup to maintain. You got new services like Xolo Go that you will be able to use to bill clients for consulting, that don't cost you anything till you use it and will meet CFC rules as a non-dom in Malta. Enjoy the Malta heat wave and keep things simple. If you got assets to hold it depends what sort of assets. There are simpler solutions to hold assets also.

 

rowena

Building Trust
Entrepreneur
A UAE offshore company for a non-resident is pointless for tax purposes. Any country with CFC rules will tax it so why bother.
Maybe it is a newbie question but how about the status of UAE offshore company with UAE resident owner? I have UAE offshore company but also I am UAE resident(by the way I am not EU/USA citizen).
 

Martin Everson

HNWI Offshore Consultant
Business Angel
Mentor Group
Maybe it is a newbie question but how about the status of UAE offshore company with UAE resident owner? I have UAE offshore company but also I am UAE resident(by the way I am not EU/USA citizen).
Even without any substance to your UAE business the tax liability will flow through to yourself and because your based in UAE then no tax anyway. More concerns is any fine for not doing something for the substance requirement in new law. I would 100% contact the author of that article and seek the "health check". Don' f'up in the UAE their laws can be BS, change quickly and often opaque and ignorance is no excuse over there. Don't rely on a random service provider who sold you a company with residency permit. It's you that's ultimately responsible for the company.

 

rowena

Building Trust
Entrepreneur
Thanks for the information. I will contact.

Yes, actually my main concern is fine for doing nothing because I have not clue how to submit a "report.
 

ram74

New Member
Thats very expensive setup to maintain. You got new services like Xolo Go that you will be able to use to bill clients for consulting, that don't cost you anything till you use it and will meet CFC rules as a non-dom in Malta. Enjoy the Malta heat wave and keep things simple. If you got assets to hold it depends what sort of assets. There are simpler solutions to hold assets also.

Xolo looks interesting. It's true that salaries of Estonian non-resident are not tax liable there?

I also like to keep things simple. So what do you suggest to hold bankable assets?
 

rowena

Building Trust
Entrepreneur
@Martin Everson
One more question. If I checked correctly, this rule only applies the following businesses:

  • Banking
  • Insurance
  • Fund management
  • Lease-finance
  • Headquarters
  • Shipping
  • Holding company
  • Intellectual property (IP)
  • Distribution and service centre
My business is not one of them(I sell my entertainment app via App Store). What do you think?
 

Martin Everson

HNWI Offshore Consultant
Business Angel
Mentor Group
My business is not one of them(I sell my entertainment app via App Store). What do you think?
Check to be on safe side. Just pay for a "legal opinion" on your tax/substance status. Such paperwork you can keep and show to other tax authorities if you get problem. My "legal opinions" were needed for opening an account at two banks in Switzerland for trade finance some years back...handy to have.

I think your totally ok being resident over there but missing to complete a return.......:(
 

rowena

Building Trust
Entrepreneur
It makes sense but I will wait several months before pay consultation because, right now, even guidelines to report is not known.
 

Martin Everson

HNWI Offshore Consultant
Business Angel
Mentor Group
Xolo looks interesting. It's true that salaries of Estonian non-resident are not tax liable there?

So what do you suggest to hold bankable assets?
No idea what assets you are talking about i.e gold bars, securities or stuffed chihuahua?
 

Mihajlo

New Member
My business is the copper trade. I signed a contract for the delivery of large quantities of copper and I wanted to work through an offshore company because of the big price difference. I was advised to start a company in RAK but did not opt for a bank. My payment comes from Deutsche Bank AG, Frankfurt.
What is your opinion and advice?
 

Martin Everson

HNWI Offshore Consultant
Business Angel
Mentor Group
Where to register offshore and at which bank account for a copper trade ?
For an EU setup then setup a local Malta company with foreign shareholders (5% tax rate after full imputation) and use Fimbank in Malta. They have very tough compliance but setup works well.

For non-EU setup you can try generic offshore company and EuroExim bank in St Lucia. However I have never used them however.
 

funk

Offshore Agent
UAE offshore companies don't have to maintain economic substance because offshore companies have a non resident status in UAE and by law they cant maintain economic substance. UAE offshore company don't benefit from any double taxation treaty as well and can't get tax residency certificate like freezone and mainland company can.
 
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