On 10 October 2019, the European Union (EU) agreed to remove the United Arab Emirates (UAE) from their list of non-cooperative tax jurisdictions (the EU blacklist). This followed from the introduction of the Economic Substance Regulations (ESR) in the UAE in March 2019, and more recently, the specific Guidance on the ESR (the Guidance) published by the UAE Ministry of Finance in September 2019.
The removal from the EU blacklist should give multinationals more comfort that their UAE establishments (including companies, branches and representative offices) can take advantage of the relevant double tax treaty in place, and further increase trust in the market and growth in investments in the UAE. Furthermore, other jurisdictions may follow suit and remove the UAE from their domestic list of tax havens or list of non-cooperative tax jurisdictions which should make it easier and more efficient for companies established in those countries to do business in the UAE.
As reported in our previous alert, companies carrying out relevant activities in the UAE are required to meet the minimal substance requirements and to conduct annual compliance reporting. Set out here are some of the specific guidelines under the newly issued Guidance on the interpretation of and compliance with the ESR.
Under the ESR, the relevant activities carried out by companies to generate income in the UAE, whether onshore or in the free zones including financial free zones, include:
- Investment fund management;
- Leasing and finance;
- Intellectual property;
- Holding company business; and
- Distribution and service centers.
Guidance: If a company carries out a relevant activity, it should review the requirements applicable to such activity under the ESR. If it carries out more than one relevant activity, it should satisfy the Economic Substance Test for each activity.
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