United Arab Emirate’s commitment as a member of the OECD inclusive Framework, and in response to an assessment of the United Arab Emirates’ tax framework by the European Union (EU) Code of Conduct Group on Business Taxation, the United Arab Emirates introduced a Resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) on 30 April 2019. Guidance that provides further clarification on the application of the Regulations was issued on 11 September 2019. The Regulations require United Arab Emirate onshore, free zone companies and other United Arab Emirates business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the United Arab Emirates relative to the activities they undertake.
The provisions of the rules shall not apply to Companies in which the Federal Government of the United Arab Emirates or the Government of any Emirate of the United Arab Emirates, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital. The rules apply to financial years starting on or from 01st January 2019. Entities that are governed by the rules will need to submit a notification to their Regulatory Authority (defined under Cabinet Decision No (58) of 2019 issued on 04th September 2019) from 01st January 2020 onwards, and prepare and submit to the same Regulatory Authority an economic substance declaration within 12 months/ 1 year from the end of their financial year (e.g. 31st December 2020 for entities with a financial year ending 31st December 2019). Entities are not required to meet the economic substance test and file an economic substance declaration for any financial period in which it has not earned income from a Relevant Activity. Failure by an entity to comply with the rules shall result in administrative penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and potential suspension, revocation, or non-renewal of its registration.