The UAE introduces new Economic Substance Rules

What does this mean for businesses?

The United Arab Emirates (UAE) released the Cabinet of Ministers Resolution n. 31/2019 with effect from 30 April 2019, concerning the Regulations for Economic Substance (ES) in the UAE. The introduction of the new ES rules is a milestone for the UAE’s tax policy and an important step towards its alignment with the global Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) directives.

In May 2018, the UAE joined the OECD Inclusive Framework on BEPS and committed to introduce the minimum standards by the end of 2018.

The purpose of the ES rules is to bring specific requirements for businesses to demonstrate the actual economic activity in the country and the basis to support that the incorporation in the UAE was not driven solely to benefit from the privileged tax regime.

The UAE ES rules are broadly similar to the regulations introduced by other countries with similar tax environment (i.e. no or only nominal tax), as they follow the guidance issued by the European Union (EU) and OECD. Essentially, the economic substance test is based on the three common key pillars that businesses need to comply with:

  • Company should be directed and managed from the UAE;
  • Core Income Generating Activity related to the activities covered by the ES rules should be undertaken in the UAE;
  • Adequate number of qualified employees, office space and annual expenditures in the UAE.

Deloitte has therefore compiled a summary document outlining the main topics introduced by the UAE ES rules, including who should be covered, the activities applicable for the economic substance test, compliance and reporting obligations besides other key takeaways the businesses should be aware in order to be compliant.

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