The United Arab Emirates has introduced economic substance legislation, Cabinet Resolution No. 31 of 2019, with the aim of being removed from the European Union’s blacklist of uncooperative jurisdictions.
The blacklisting was announced in March, after the EU’s Code of Conduct Group (Business Taxation) (CCG) named the UAE as one of the jurisdictions it considered to be facilitating offshore structures or arrangements aimed at attracting overseas profits that do not reflect real economic activity in the jurisdiction: the CCG’s so-called Criterion 2.2.
The economic substance legislation that has now been introduced by the UAE, as Cabinet Resolution No. 31 of 2019, aims to address this by meeting the CCG’s substance requirements, as many other international financial centres have also done.
The legislation requires relevant companies to conduct certain core business activities within the jurisdiction, such as incurring operating expenses and taking relevant management decisions. Directors, management and an appropriate number of qualified staff will have to be physically present in the UAE. The company will have to incur sufficient expenses and have sufficient physical assets in the UAE, and will have to control the execution of activities outsourced to third parties.
Affected companies must ensure that their boards have frequent quorate meetings in the UAE, minuted and signed by all attendees, and all the records must be kept within the UAE.
For legal entities such as branches, representative offices and other companies who are managed by a single director, that manager must be physically present in the UAE when making the main decisions. Holding companies are subject to less extensive requirements.
Firms within the legislation’s scope must file annual reports no later than 12 months after the end of their financial year, with the first reports due in April 2020.
Fines of up to AED50,000 will be imposed for late reporting. Failure to meet the mandatory substance requirements will risk a fine of up to AED300,000 and possible licence suspension, deregistration or even compulsory liquidation.