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28 April 2020
Economic Substance Regulation in UAE – Recent Updates and Announcements
 
The inaugural year of Economic Substance Regulations (Regulation) in UAE is proving to be a testing time for most businesses across the UAE. The region which does not have any Income Tax regime to date has introduced a Regulation that seeks to ensure that businesses in the UAE meet the test of substance, which is generally applied by a country to keep a check on the tax avoidance case. Understandably, the Regulations were introduced in response to the European Union’s requirement to remove UAE from the EU Blacklist, i.e., EU list of non-co-operative jurisdictions for tax purposes.

The Regulations are also a part of the UAE's commitment to implement all minimum standards of the flagship BEPS project of the OECD.

Click Here Key highlights of FAQs on Economic Substance Regulations in UAE
Click Here Introduction of Economic Substance Regulations in UAE

    
Compliance requirement
The Regulations require all covered licensees to undertake mandatory compliance as under:
   
Compliance to be undertaken Due date
Notification to be filed
 
To be notified by Regulatory Authorities (Refer different deadlines announced by different zones below)
Report to be filed Within 12 months from the end of Financial Year (i.e., 31 December 2020 for the Year 2019)

Failure to follow the above compliances may attract an administrative penalty between the range of AED 10,000 to AED 300,000.
 
Statutory timelines to furnish notification for the year 2019
Recently, Dubai International Finance Centre (DIFC) has informed its licensees that a notification would be required to be furnished on or before 12 June 2020. Further, DIFC shall release the said notification form on 1 May 2020.
 
Similarly, most of the other zones within the UAE have also prescribed timelines for furnishing the notification for the year 2019, as below:

 
Zones/ Licensors Notification Deadline
Dubai Airport Free Zone Authority (DAFZA) 3 May 2020
DIFC 12 June 2020
Ras Al Khaimah Economic Zone 30 June 2020
RAK ICC 30 June 2020
Ajman Free Zone 30 June 2020
Dubai Multi Commodities Centre (DMCC) 30 June 2020
Dubai Silicon Oasis (DSO) New deadline not yet issued (earlier deadline of 31 March 2020 was postponed)
Jebel Ali Free Zone  New deadline not yet issued (earlier deadline of 31 March 2020 was postponed)
Abu Dhabi Global Market (ADGM) New deadline not yet issued (earlier deadline of 31 March 2020 was postponed)
       
Guidance on Relevant Activities released by Ministry of Finance, UAE
Since the introduction of Regulations, the ministry has been very actively releasing various guidelines and FAQs to enable licensees to test the compliance requirement in their case. Recently, the Ministry of Finance, UAE, has released additional guidance on the 'Relevant Activities' and their associated 'Core Income Generating Activities' (CIGAs) to understand the scope and application of the Regulation. 

It has been clarified that additional guidance should be read in conjunction with the Regulation, Frequently Asked Questions (FAQs) and guidance issued earlier.
Our Comments
The initial implementation was always expected to be challenging. Besides, certain stages of the implementation require a structural change in the operations of the business, which was not possible to be executed in the first year itself.  The convergence of the change in operating structure to meet the economic substance test is a gradual process.

The challenges have further compounded due to lockdown situations, not just in UAE but at a global level due to the COVID-19 pandemic. It remains to be seen how businesses would be able to meet the stringent substance test requirement in the current environment. For example, the Regulations suggest a key test as 'directed and managed' by conducting board meetings in the UAE. However, due to the lockdown in progress, the board members might not be able to travel. A situation of this proportion calls for certain relaxation from the Ministry's side.
 
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