Monthly Insight: Substance Requirements in the UAE

Substance Requirements in the UAE

by Nicolas Rochette

On 30 April 2019, the UAE Cabinet issued Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, the “Regulations”) requiring all in-scope UAE entities (“Relevant Entities”) that carry on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE from 30 April 2019.
Link to Resolution No.31 of 2019


SUBSTANCE…
…is a word that has become very familiar to International Businessmen operating through Offshore structures, especially to BVI company owners following the British Virgin Islands issuance of The Economic Substance Act which came into effect on 1 January 2019.

This new Law is in response to the EU Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
Embracing the EU standards of tax transparency has no doubt become a global trend in 2017-2018 and besides the BVI,  87 other countries have signed the convention including the United Arab Emirates.

At Loggerhead, we welcome this changing environment and see it as an opportunity for major credible international business hubs such as the UAE to implement a transparent framework around the notion of Substance and clear any doubts that the region was ever a tax haven.

In principle, UAE corporations are considered to be resident of the UAE the moment they are incorporated under UAE Law. As for individuals, they become UAE residents the moment they are granted a Residency Visa.
But even if you are a UAE business owner and a UAE Resident, you might want to look into enhancing the economic substance of your UAE structure.

As of today, the UAE has not yet formally implemented a framework around the concept of Substance although Resolution No.31 of 2019 draws the contour of the new Regulation which should come into effect in January 2020. That being said, the UAE already requires that any corporation operating here must possess adequate substance.
Each company license, whether onshore UAE or in one of the 50+ Free Zones is attached to a commercial physical space, an office, a retail outlet, a warehouse or a shared spaced such as a flexidesk or shared office.

We encourage and assist our clients to think of Substance as “providing evidence that an entity has an actual economic substance in the jurisdiction where it is established”.
Furthermore, “tax substance” will be achieved if sufficient economic substance is reached to qualify for the benefits of a tax treaty.


CASE STUDY

An accomplished businessman has relocated the headquarters of his family business to the UAE and operates and invoices his clients from the UAE company. The company is currently self-managed by the owner. The business does not require a physical office since most of the business is conducted either remotely or at the client’s site in a different country altogether. This requires the owner/manager to travel extensively. The owner/manager is a UAE resident but spends a limited amount of time in the UAE and does not possess a residential address in the UAE.


An indicative step-by-step guide to add further Economic substance to a UAE business:

  1. Maintaining a permanent, dedicated and identifiable office in the UAE (in any Emirate)
  2. Having a dedicated PO BOX, phone landline, as well as a website for the company (preferably on the local domain i.e. www.abc-company.ae)
  3. Using local service providers and/or carrying out core income generating activities in the region
  4. Documenting the operations of the company (Accounting reports, Annual audited financial reports, board resolutions etc.)
  5. Employing an adequate number of suitably qualified employees physically present in the UAE
  6. Managing and controlling the business from the UAE.

Item 6. of the above list “Managing and controlling the business from the UAE” should not be overlooked since banks, third parties or foreign authorities could challenge the economic substance of a business if it fails to demonstrate that it is managed and controlled from the UAE.
The best way to satisfy that requirement is to add substance to the Management Team (Shareholders, Directors and General Managers) personal residency status.


A step-by-step guide to add economic substance to an individual’s residency status:

  1. Maintaining a personal account on which salary payments are made and from which local expenses are deducted
  2. Obtaining a local phone number and a personal PO BOX
  3. Sourcing a residential address in the UAE and connect the utilities (water, electricity, internet)
  4. Obtain additional evidence of residency
    a. UAE driving license
    b. UAE liquor license (Where appropriated)
    c. Other

 

“SO, WHAT ARE THE CONSEQUENCES FOR MY BUSINESS IF I LACK ECONOMIC SUBSTANCE?”

Until a Law comes into effect, the lack of substance can generate difficulties operating with local banks. Generally speaking, the more substance, the smoother the relationship with banks. Foreign authorities can also challenge a business or an individual’s self-declared tax residency based on a lack of substance. Other than that, the company can conduct its business normally.

After a Law comes into effect, however, some reporting and economic substance requirements for ‘legal entities’ conducting ‘relevant activities’ could be imposed by the Law.
Hence, legal entities will be required to report certain information on their activities on an annual basis to the Authorities directly or via their UAE registered agent.

As mentioned above, UAE corporations already comply with the concept of Substance. Besides, the UAE benefits from a liberal labor law which makes it easy to hire staff (if required), while also benefiting from a very developed and competitive commercial real estate market giving access to cost effective office solutions (simple office, furnished office, serviced office, warehouses,..)

 

“I HAVE HEARD THAT COMPANIES AS WELL AS INDIVIDUALS CAN OBTAIN UAE TAX CERTIFICATES. WILL OBTAINING A TAX CERTIFICATE SATISFY THE SUBSTANCE REQUIREMENT?”

Tax Residency will be achieved if sufficient economic substance is reached to qualify for the benefits of a tax treaty. UAE Corporate and Personal Tax Certificates are issued yearly by the UAE Ministry of Finance. Obtaining this status (corporate and personal) is usually enough evidence of Substance. The UAE has 115 signed Double Taxation Agreements with most of its trade partners offering full protection to taxpayers from double taxation.

 

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