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Webinar Highlights: Economic Substance Regulations Act

May 13, 2020

The latest webinar conducted by Creative Zone, on the UAE’s Economic Substance Regulation proved to be an extremely helpful one to business owners carrying out trade activities within and via UAE. The session was presided over by Nilesh Ashar, Tax Partner at KPMG Middle East and moderated by Lorenzo Jooris, CEO, Creative Zone. Nilesh, with his vast experience of 24 years in the Tax and M&A segment highlighted key details of the recently passed resolution and clarified the pressing concerns that anxious participants had about the procedures and processes of the Act.

The Economic Substance Regulation has largely emerged from OECD’s initiatives on Global Tax Avoidance Measures, that some multinational companies have been alleged to indulge in. UAE being a member of the OECD’s inclusive framework is committed to participate in any Global Tax Avoidance program and the Economic Substance regulation is a key action towards it.

In simple terms any business entity in the UAE, whether it is a branch, shareholding, or joint stock company carrying out any one of the nine trading activities mentioned in the resolution will have to provide a substance declaration.

These nine trading activities are:

  • Banking business
  • Insurance business
  • Investment-fund management business
  • Lease finance business
  • Headquarters business
  • Shipping business
  • Holding company business
  • Intellectual property business
  • Distribution and service center business

There are two important factors that businesses should be wary of, first one being the Notification Filling, Companies need to communicate to the authorities if they are carrying out any of the listed activities and whether they are earning any income from that particular activity. A return has to filed by the end of the year. Same holds true for Free zone companies, whose regulating authorities have come out with a due date for submitting the notification form. For Mainland companies the regulating authority is the Ministry of Economy who will be soon declaring a due date for the same. Nilesh projected that it will be around June that companies will have to submit their notification and reports.

Nilesh advised that before filing it is important that companies conduct an internal assessment about what entities are going to exposed and what is it that they are going to file. As a relevant activity that has earned them an income will require for a detailed report at the end of the year and a relevant activity which was carried out but did not earn any money will call for only a notification submission. A detailed Reporting is required only when the pertinent activity was carried out and an income was earned.

Nilesh further explained why these nine activities were chosen by the authorities. According to OECD’s analysis these are ‘Geographically Mobile Income’, that essentially means that they have the potential of being performed in any jurisdiction without there being a need to actively demonstrate substance and the guiding principle behind this resolution is to demonstrate substance.

The webinar also discussed the three substance tests that companies will have to take

  1. Companies will have to demonstrate that entities are managed and directed in the UAE. Along with showing that the company has an active board of directors with appropriate skills and qualifications.
  2. Are the core income generating activities taking place in the UAE, for instance if its Head Office based company one has to prove that the management decisions, incurring operation expenditure and other activities of the group are happening in the UAE.
  3. The third is the adequacy test, which primarily includes showing qualified employees, expenditures, operations and physical presence in the UAE.

The session invoked many relevant and specific questions relating to the Act which were answered in detail by the speaker. Nilesh walked the audience through the notification form, as many companies will face something like this at first and warranted many obvious concerns and queries.

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