Economic Substance Regulations in the UAE - Part 1
November 12, 2020
The United Arab Emirates (UAE) was removed from the European Union (EU) blacklist by the Code of Conduct Group on Business Taxation on 10 October 2019, all thanks to the introduction of Economic Substance Regulations. These new regulations were introduced under the specific guidance issued by the UAE Ministry of Finance. The purpose of the Regulations is to ensure that UAE entities adhere to additional compliance and substance requirements for UAE businesses in certain sectors. The new regulations have led to enhanced confidence of international investors and financial institutions and the UAE still is an extremely attractive place to incorporate a new business.
So the question is: how do these Economic Substance Rules affect UAE business owners?
The way in which a UAE company is managed and owned is critical when deciding to setup a business in the UAE. Companies that need to comply with these Economic Substance Rules need to have someone running the business who is physically based in the UAE. This should be a high-level executive – either a managing director or a senior management team member. If no one senior is able to relocate to the UAE, you will need to find a senior manager locally in the UAE in order to be compliant. This is something New Horizons Business Consultants can facilitate and help you with.In addition, regular board meetings must be held in the UAE.
Companies need to ensure that a sizable amount of their operating expenses are incurred in the UAE. This is a fairly standard expectation for most companies with an office in any nation. So, if you’re running your business in a way that reflects honest day-to-day operations, there will be no issue whatsoever.
Staffing and office space.
As part of the Economic Substance Rules, companies operating in certain sectors need to have a physical office space and employees working in the UAE. When it comes to having the right company setup, an office address is essential in some cases. However, many smaller businesses that lay outside of Economic Substance Rules can simply have a flexi-desk or virtual desk arrangement to operate a business in the UAE.
Companies affected by the Economic Substance Rules need to declare to their license issuing authority details of the ‘relevant activities’ set out by the UAE government. Not doing so can result in a fine and repeat offences will incur financial penalties which could lead to either suspension or the withdrawal of the non-compliant company’s trade license. There will be some degree of scrutiny over the way you operate your business. Nevertheless: the nature of the information requested – details of profit, revenue, number of employees, registered address – is no more complex than anything required by a tax or licensing authority in any other part of the world.
Since we are still in the first year of the UAE’s Economic Substance Rules’s implementation, the degree to which all of these regulations will be upheld remains to be seen. The UAE government has made a commitment to addressing concerns around the shifting of profits – in the same way that other offshore tax havens have, in order to avoid being on the EU’s tax blacklist.
These new developments drive more foreign investment and has made the UAE a full compliant international player with the global tax community. The new regulations are in line with UAE’s membership of OECD BEPS (Base Erosion & Profit Shifting) inclusive framework.
The UAE offers multiple business and investment opportunities due to its unique geographical location, legal framework, taxation policies, economic stability, strong banking system and highly developed infrastructure.
Setting up a business in the UAE is attractive for multiple reasons. There are numerous economic free zones that allow 100% foreign ownership where one can benefit from no corporate tax, no income tax, no wealth tax and no capital gains tax.
If you are keen to explore your business opportunities here in the UAE, it is important to fully understand the potential benefits, rules and regulations around the type of company you want to incorporate. While a lot of information is available on the internet, it is advisable to contact an expert such as New Horizons Business Consultants regarding the various advantageous opportunities for you and your business.
Even with these recent regulatory developments, you will still be able to benefit from a tax-free corporate environment in one of the world’s most attractive business and lifestyle destinations!