As a member of Organization for Economic Development and Cooperation (OECD), and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group, the UAE has committed to ensuring standards related to Base Erosion and Profit Shifting (BEPS) are implemented.
During 2019, UAE introduced various Federal Legislation including:
- On 30 April 2019, UAE Cabinet of Ministers Resolution No. 31 Of 2019 was introduced concerning Economic Substance.
- On 11 September 2019, Ministerial Decision No. 215 for the year 2019 providing guidance on Cabinet Decision No.31 of 2019 was introduced.
The above legislations apply across the whole of the UAE, including all Free Zones and Financial Free Zones (such as the Dubai Multi Commodities Centre).
Economic Substance for Dubai Multi Commodities Centre (DMCC) entities-Requirements
DMCC advises the following information in respect to Economic Substance Reporting;
- UAE Cabinet Decision No. 31/2019 dated 30th April, 2019 concerning the economic substance
regulations (the “Economic Substance Regulation”)
- Further to the previous guidance notes dated 6th January, and 27th February, 2020,
DMCC advises the following further information in respect to Economic
Substance Reporting (“ESR”);
Whilst DMCC is continuing to seek further guidance and direction from Ministry of Finance and Free Zone Council especially in respect to the effect on member companies during the COVID-19 pandemic, it is currently understanding the requirement for each DMCC member company is to provide an annual declaration of whether they have conducted any Relevant Activities in the preceding financial year by latest 30th June, 2020.
The Economic Substance Resolution is issued pursuant to the global standard set by the OECD Forum on Harmful Tax Practices (FHTP) which requires companies to have substantial activities in a jurisdiction.
- Every company registered and licensed in the UAE that carries on a “Relevant Activity” in the UAE, including any free zone company, must comply with the Economic Substance Resolution by satisfying the “Economic Substance Test” and complying with certain reporting requirements. The Relevant Activities are listed in Article 4 of the Resolution, and within the below link to the Ministerial decision no.215.
- DMCCA (“Regulatory Authority”) has been appointed as the regulatory authority for applicable DMCC Licensees as per Cabinet Resolution No. 58 of 2019.
- From 2020 onwards, every Licensee will have to make an annual declaration as to whether they have conducted any Relevant Activities in the preceding financial year.
- Ministerial decision no. 215 for the year 2019 on the issuance of directives for the implementation of the provisions of the cabinet decision no. 31 of 2019 concerning economic substance requirements;
Notification and Economic Substance Report
The Regulations require entities holding a trade license in the UAE onshore or in a free zone to:
- notify the Regulatory Authority (to be determined by a Cabinet Ministers’ resolution) on an annual basis as to whether they are carrying on a “relevant activity”; whether any income is subject to tax outside the UAE; and the date of the financial year end; and
- submit an annual report to the Regulatory Authority (each year) if it they are carrying on a “relevant activity” providing details related to the activity, income, expenses and assets and declaring whether the economic substance test is met. The report must be submitted within 12 months of the end of each financial year.
The report will need to be submitted:
- for financial years commencing on or after 1 January 2019. Therefore, for entities with a financial year ending on 31 December 2019, the first report will be required to be submitted by 31 December 2020;
- by each UAE entity individually, rather than under one submission, even if a business has a number of entities registered in the UAE.
Failure to Comply
A number of significant sanctions may be imposed by the authorities against a business that fails to comply with the Regulations framework, e.g.:
- A fine of AED 50,000, for failure to meet the economic substance test or to provide information;
- A fine of up to AED 300,000, suspension, revocation or non-renewal of the license for a repeated failure to meet the economic substance test; and/ or
- disclosure by the Ministry of Finance, to foreign authorities in the country where the entity is incorporated or in which the parent company, ultimate parent or ultimate beneficial owner are resident, of information of the UAE entity concerning its lack of the economic substance in the UAE.
What Should You Do Now?
Since we understand that UAE businesses will be required to advise the Relevant Authority of their economic substance in respect of their financial year commencing on or after 1 January 2019 and will need to file the report within 12 months of the end of the financial year, you should:
- assess if the Regulations apply to your UAE entities;
- verify if the entity complies with the Regulations and, if they do not comply;
- take steps to remedy the incompliance so that you are aligned line with the Regulations by the time you submit the report with the Relevant Authority.
How can we help?
As the best Auditors & Accounting firm in the Middle East and with our strong corporate structuring and tax expertise and experience across all industry sectors in the Middle East, Alya Auditor’s experts will be delighted to assist you as follows:
- Review whether or not your UAE entities are subject to the Regulations;
- If they are subject, assess if your UAE operations across all emirates, onshore/ free zones, are currently expected to meet the requirements for economic substance under the Regulations; and
- Recommend solutions to remedy potential incompliance, in order for you to comply with the Regulations.
- Assist in implementing the recommended solutions to comply with the Regulations.
(b) Ongoing Compliance
- Prepare the notification and the report for submission with the Regulatory Authority.
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