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The key impact of the Resolution is the obligation of companies carrying out relevant activities to meet the specified Economic Substance requirements and to conduct annual compliance reporting. Non-compliant companies could risk fines and penalties, suspension, withdrawal or non-renewal of licenses, and the disclosure of their position to other foreign authorities. Companies in the UAE carrying out the relevant activities must file their first report within 12 months from the end of their fiscal year.
Why has the UAE issued the Resolution?
In March 2019, the European Union (EU) published an updated list of non-cooperative tax jurisdictions (the EU blacklist), which included the United Arab Emirates (UAE) for not delivering on its commitment “to comply with the EU’s good governance criteria”. Since then the UAE has issued new legislation under Cabinet Resolution No. 31 of 2019 (the Resolution) which specifies the requirements for companies to have economic substance or a presence in the UAE. Although the Resolution was published on 19 June 2019, compliance with the requirements has been in force since 30 April 2019.
Which entities does the Resolution apply to?
Under the Resolution, the Economic Substance requirements apply to companies that generate income by carrying out the following relevant activities in the UAE, whether onshore or in the free zones including financial free zones:
- Banking;
- Insurance services;
- Investment fund management;
- Finance leasing;
- Headquarter activities related to (i) conducting management decisions, (ii) incurring operational expenditures on behalf of group entities, and (iii) coordinating group activities;
- Shipping;
- Intellectual property services;
- Holding company activities; and
- Distribution and service center activities provided to non-UAE related persons including (i) transporting and storing spare parts, materials or ready-for-sale goods, (ii) managing inventories (iii) taking orders, and (iv) providing consulting or other administrative services.
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