There is a distinctive turn of events on the ground here in the UAE and GCC; what one predicted to be a quiet, sultry summer, certainly was not!
India
I recently attended the Annual Family Office Summits in New Delhi and Mumbai and the conversations amongst panellists were refreshingly engaging and certainly reflective of good family governance. There is an obvious heightened degree of awareness of the benefits of structured wealth preservation, asset management and robust succession solutions. Trends are clearly emerging and the next generations are certainly taking a more active role by adding a fresh perspective. Of course in a market such as India, where such behavioural patterns are constantly developing, it is but a handful of families that act as role models for the rest. If what I have seen and heard recently is indeed a true reflection of the emerging wealth management industry, then I am excited about the potential, provided the key professional advisers adopt best practice and excellent standards. I hope to host our Stephenson Harwood private wealth global forum in India in Q1 2020, where we shall bring the private wealth community together and highlight best practice and key considerations that will benefit all.
DIFC Foundations
I can finally breathe a sigh of relief as we continue to see how the DIFC Foundation has gathered traction and is indeed a commercially viable and legally acceptable structure for succession planning and wealth management purposes, both for Muslim and non-Muslim clients.
In fact, I would go as far as to say that one can actually be rather creative when advising Families and deliver a structure that allows a tremendous amount of flexibility, anonymity and freedom, both from a personal and business perspective. As we create bespoke solutions for each client, the advantages of using the DIFC Foundation, especially where immoveable assets form part of a portfolio, are extremely attractive without being prohibitively expensive.
Q&A on the UAE’s Economic Substance Regulations 2019
So, in an attempt to give you all a snapshot of what you need to know about the new Economic Substance Regulations, clearly the new “hot topic”, here are our Top 5 questions and answers:
Q1 What do I need to know about the Resolution on Economic Substance?
On 30 April 2019, the Cabinet of the United Arab Emirates issued a new resolution on the specification of the requirements for real economic substance within the UAE, No. 31/2019 (the “Resolution”). The Resolution aims to facilitate tax transparency and fair tax competition in the UAE. Following recent trends of other tax free jurisdictions, such as the Cayman Islands and Jersey, this Resolution is a step forward in removing the UAE from the Organisation for Economic Co-operation and Development's (“OECD”) list of non-cooperative jurisdictions for tax purposes. In fact on 10 October 2019, the UAE has been removed from the EU’s black list of tax havens; this in itself shows progression and a positive step in the right direction that shall boost investment in the UAE.
Further guidance was subsequently released by the Finance Ministry on 11 September 2019 in Ministerial Decision No. 215/2019 (the “Guidance”).
In essence, the Resolution imposes compliance obligations relating to economic activities of individuals and companies (both onshore and in free zones) (the "Person") that are licenced to undertake certain types of business in the UAE.
Q2 Does this Resolution apply to me?
The Resolution applies to any Person (private individuals and corporate entities) that is licensed in the UAE from the relevant licensing authority, whether onshore or in one of the UAE Freezones, to carry out one or more of the activities listed below (the “Relevant Activity”).
The Resolution does not apply to companies, in which the Federal Government, or the Government of any Emirate of the UAE, or any governmental authority or body has, directly or indirectly, at least 51% ownership.
The Resolution lists the following activities as Relevant Activity1:
Banking business;
Insurance business;
Investment funds management business;
Lease-finance business;
Shipping business;
Headquarters business;
Holding company business;
Intellectual property business; and
Distribution and service centre business
Q3 What are the requirements of the Resolution?
Any Person that is licensed to undertake any Relevant Activity in the UAE, must on an annual basis, with effect from 1 January 2020, notify the relevant regulatory authority (the “Regulatory Authority”)2, if such Person has undertaken any Relevant Activity and has any income derived from such Relevant Activity (wholly or partly) that is subject to any tax regulation outside the UAE. Such notification should also include details of its fiscal year end (the “Notification”).
Any Person that has undertaken any of the Relevant Activities will also be required to submit to the Regulatory Authority an annual report in the prescribed form (the “Report”). The Report should establish that the Person has satisfied the requirements of the Economic Substance Test.
Q4 How do I satisfy the Requirements of Real Economic Substance?
Every Person that carries out a Relevant Activity and derives income in the UAE will be required to satisfy the economic substance test as set out below:
- The Person carries out the relevant core income generating activities in the UAE (“CIGA”). The Resolution provides a non-exhaustive list of the CIGA for each Relevant Activity.
- The direction and management of the Relevant Activity should take place in the UAE. To demonstrate this, the Person must ensure that an adequate number of board meetings are held in the UAE with quorum physically present in the UAE. Additionally, minutes must be taken, signed and kept within the jurisdiction.
- If the Person does not have a board of directors and is managed by an individual manager, then the above direction and management requirements will apply to that individual manager.
- Subject to the level of the Relevant Activity: (i) an adequate number of qualified full-time employees must be employed and physically present in the UAE to carry out the Relevant Activity; (ii) adequate operating expenses incurred in the UAE when carrying out the Relevant Activity; and (iii) the Person has adequate tangible assets in the UAE.
- With respect to employees, expenses and assets the Person may choose to outsource to a third party, provided that the third party service provider has existing and adequate activities, employees, expenditure and premises in the UAE.
- In circumstances where CIGA's are performed by a third party, the Person must retain sufficient control over that third party.
Holding companies which generate income and profits solely from their equity investments will not be required to meet the CIGA requirements and will be subject to less stringent requirements.
Companies carrying out high risk IP business shall be subject to more onerous reporting and substance obligations.
Q5 What will happen if I do not comply with the requirements of the Resolution?
In cases of non-compliance, the Regulatory Authority may pass information to the Ministry of Finance who may in turn, communicate such information with foreign authorities. Additionally, there will be monetary sanctions varying from AED 10,000 to AED 300,000.