The UAE has recently introduced economic substance regulations, and as a result, all UAE businesses that may be subject to these regulations should be prepared to take action and ensure compliance.

What are the Economic Substance Regulations?

In 2019, the UAE issued the following legislation introducing economic substance regulations that apply across all onshore and free zone jurisdictions:

• UAE Cabinet Resolution No. 31/2019, as amended, concerning economic substance regulations in the UAE;
• guidance released by the Ministry of Finance pursuant to Ministerial Decision No. 215/2019; and
• Cabinet Resolution No. 58/2019, which designates the appropriate UAE authorities to regulate compliance under these regulations.

This legislation (collectively, referred to as the "Economic Substance Regulations") were issued in response to the UAE's inclusion in the European Union's list of non-cooperative jurisdictions for tax purposes, and their aim is to facilitate tax transparency and fair tax competition in the UAE.

Who are subject to the Economic Substance Regulations?

The Economic Substance Regulations apply to natural or juridical (legal) persons, including all UAE onshore and free zone companies, branches, foundations, non-profit organisations and partnerships (referred to as "Licensees") that carry out one or more of the following "Relevant Activities" in the UAE:

• Banking businesses;
• Insurance businesses;
• Investment fund management businesses;
• Lease-finance businesses;
• Shipping businesses;
• Headquarters businesses;
• Holding company businesses;
• Intellectual property businesses; and
• Distribution and service centre businesses.

The Economic Substance Regulations as well as the "The UAE Economic Substance Regulations Relevant Activities Guide", which was recently issued by the Ministry of Finance (the "ESR Relevant Activities Guide"), provide explanation and commentary on the meaning of each of these activities.

For instance, the ESR Relevant Activities Guide provides that UAE businesses are expected to use a "substance over form" approach to determine whether they undertake a Relevant Activity and, as a result, fall within the scope of the Economic Substance Regulations. To make this determination, Licensees should not only consider the activities stated in their commercial licences or registration certificates but also assess the activities carried out during a financial period. According to the Ministry of Finance, it is not required that a Licensee is actively engaged in any of the above business categories for it to be considered as carrying on a Relevant Activity. For example, even the passive receipt of income under one of these Relevant Activities would be considered as carrying on the activity.

What is required under the Economic Substance Regulations?

Every Licensee which carries out one or more of the Relevant Activities must submit a notification to the appropriate regulatory authority as set out in the Economic Substance Regulations.

In addition, for every financial period, any Licensee that carries out one or more of the Relevant Activities and derives income from the Relevant Activity in the UAE will be required to satisfy an "economic substance test" and submit an economic substance report with the appropriate regulatory authority within 12 months from the end of the relevant financial period. An exemption applies to companies that are at least 51% directly or indirectly owned by the Federal or an Emirate government or a UAE-based government body or authority.

The appropriate regulatory authority varies depending on the type of Relevant Activity and the location in which it is undertaken. Each regulatory authority will set out the form of the reports to be filed and the mechanisms for submitting such forms.

What is the economic substance test?

The economic substance test requires a Licensee to demonstrate that:

• the Licensee and the Relevant Activity are being directed and managed in the UAE;
• the relevant Core Income Generating Activities ("CIGAs") are being conducted in the UAE; and
• the Licensee has an adequate number of employees and adequate physical assets and expenditure in the UAE.

It should be noted that Licensees carrying out a holding company business or a high risk IP business are subject to different economic substance test requirements. Also, CIGAs vary for each of the Relevant Activities, and a non-exhaustive list is included in Cabinet Resolution No. 31/2019.

Next steps

It would be prudent for businesses to take action to ensure compliance, especially considering the current working conditions due to the COVID-19 pandemic. According to an article in the press, the Undersecretary of the Ministry of Finance has confirmed that the cut-off date for notification to the Ministry of Finance is 30 June 2020, and that this is what has been communicated to the relevant regulatory authorities. Further, he has stated that to "assure compliance, some regulators decided to cut it short." For example, the Dubai Airport Free Zone has announced that it requires notifications to be filed by 3 May 2020. In addition, the Dubai International Financial Centre has announced that its economic substance notification will be released by 1 May 2020 and that it must be submitted by 12 June 2020.

All businesses licensed onshore or in any of the free zones should analyse whether their activities fall within the scope of any Relevant Activities and, if appropriate, be prepared to file notifications in such form, manner and timing set forth by their respective regulatory authorities. It should be noted that some free zone authorities are requiring all Licensees registered in their jurisdiction, including those who do not undertake a Relevant Activity, to submit an economic substance notification. For example, the Dubai Airport Free Zone and the Dubai International Financial Centre require all Licensees registered in their jurisdiction to submit an economic substance notification.

Also, if a business is engaged in one or more Relevant Activity (even passively) and derives income from this activity, then a review of its corporate governance structure as well as a determination of whether it satisfies the economic substance test should also be made.

While some regulatory authorities have announced deadlines and have provided guidance on the notification filing process, we anticipate that additional information and guidance will soon be made available by the remaining regulatory authorities. We will continue to follow these developments and be on hand to assist you in addressing any questions concerning compliance with the Economic Substance Regulations.