Economic Substance Regulations
Economic Substance Regulations
To uphold its obligations as a member of the OECD Inclusive Framework and following an evaluation of its tax system by the European Union’s Code of Conduct Group on Business Taxation, the UAE enacted Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019) on April 30, 2019. On September 11, 2019, further guidance regarding the application of these Regulations was provided (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 identified the Regulatory Authorities responsible for administering and enforcing the Regulations. Amendments to these Regulations were introduced through Cabinet of Ministers Resolution No. 57 of 2020 on August 10, 2020, with updated guidance released on August 19, 2020 (Ministerial Decision No. 100 of 2020).
The Regulations mandate that UAE onshore and free zone companies, along with certain other business forms engaged in defined "Relevant Activities," maintain and demonstrate sufficient "economic presence" in the UAE relative to their undertakings, known as the "Economic Substance Test." The Regulations apply to financial years beginning on or after January 1, 2019. Entities falling under these Regulations must submit an annual Notification form to their Regulatory Authority and complete an Economic Substance Report within 12 months after the end of their financial year (for example, by December 31, 2020, for those concluding their financial year on December 31, 2019). However, an entity does not need to fulfill the Economic Substance Test or file an Economic Substance Report for any financial period in which it did not earn income from a Relevant Activity or if it qualifies for an exemption, although a Notification form must still be submitted. Noncompliance with the Regulations may lead to penalties, automatic information sharing with the Foreign Competent Authority (as mentioned in Article 1 of the Regulations), and other administrative actions, including suspension, revocation, or non-renewal of the entity's trade license or permit. For further inquiries, please call +971581262683.