News and developments
News Alert: Economic Substance Requirements Guidance Issued
The Ministerial Decision of September 2019 (the “Guidance”) is served as a ‘preliminary’
advice on how the Economic Substance Test (“EST”), could be met for the purposes of
complying, in accordance, with the provisions of the ESR. The Guidance provides various
procedures and functions as to how the Regulatory Authorities wish to enforce and asses the test.
The Guidance may be amended from time to time, revised or expanded
by the appropriate Regulatory Authorities.
Exemption
At the outset, the Guidance confirms that the ESR is not applicable
towards companies where any of the following governmental bodies have at least 51% direct or indirect ownership
in its shareholding. These bodies include:
- The federal government, or;
- Government of any Emirate of the UAE, or;
- Any governmental authority or body of any of them.
- By way of self-reporting; and
- Pursuant to specific requirements made by the Regulatory Authority.
- Whether a Licensee (company) carries out Relevant Activity; and
- Whether or not all or any part of the Licensee's gross income in relation to a Relevant Activity is subject to tax in a jurisdiction outside of the UAE;
- The date of the end of that Licensee's Financial Year;
- Information referring to the relevant income and operational expenses of the company, its employees, management, board meetings, intellectual property assets and activities, location and place of business, outsourced business, as determined in detail by Article 8(4) of the ESR. The Regulatory Authorities may require additional documents, in order to evaluate whether a company and its activities meet the EST.
- The Licensee portraying that their activities have adequate substance. The ESR has pointed out what activities are considered ‘Core Activities', under Article 5 ESR. However, the guidance mentions that this not an exhaustive list. Meaning, the licensee may use that list, but are not limited towards them. Therefore, a Licensee should analyze the nature of their Relevant Activity(ies), rather than focusing only on Core Income- Generating Activities ("CIGA") list under the ESR.
- The Licensee to show whether their entity has satisfied the ‘directed and managed' test appropriately, by elaborating that at least one (1) meeting should be held per financial year which should be signed by all attendees physically present in the UAE. Furthermore, the applicable law under which that entity is governed by should be considered regarding meeting requirements.
- The Licensee showing that their Relevant Activity is engaging in a ‘genuine business activity', whilst carrying out the relevant CIGA in the UAE with the employees, expenditure and premises. The guidance mentions that the EST has no intentions to compare a smaller firm's requirements to the same level of a medium-large firm. Each EST will be individually assed as per the firm's nature and level of the relevant activity, income earned and the firm's size.
- The Licensee proving that outsourcing to third party service providers are not being undertaken with the intention of trying to evade compliance with the EST, if brought up. Furthermore, within an agreement between the Licensee and the outsourced, the Licensee should consider mentioning ECR compliance terms, such as disclosing information to the Regulatory Authority, for conformity purposes. The Guidance also notes that double counting is not allowed if the services are provided to more than one Licensee carrying out a Relevant Activity in the UAE.