Need for these regulations
The OECD's BEPS project, endorsed by the G20 countries, was commissioned with a view to bringing more substance, coherence and transparency to the international taxation system and addressed the requirement of substantial activity in its report on BEPS Action 5.
UAE businesses covered
The regulations apply to a licensee that carries out a 'relevant activity', established in the UAE mainland or the various free zones as a representative office, branch or a commercial enterprise. The regulations would not apply to government-owned enterprises (directly or indirectly).
Requirements
All entities in the UAE need to notify the regulatory authority (the authority that has issued the business licence to the entity) of its financial year-end and whether or not it is carrying on a relevant activity. A UAE entity undertaking a relevant activity would need to submit a report to the regulatory authority within 12 months after its financial year end.
Consequences of failure to comply
Where an entity fails to meet the economic substance test, an amount of administrative penalty between Dh10,000 and Dh50,000 shall be imposed (between Dh50,000 and Dh300,000 if the test is failed the subsequent year as well). Further, a separate penalty between Dh10,000 and Dh50,000 could be levied for failure to provide any information or providing inaccurate information.
Subjectivity around these requirements
Though the regulations are effective April 30, 2019, additional guidance and regulations are expected in due course. This should clarify concerns regarding practical applicability of the regulations and meaning of terms like "adequate" used extensively in the regulations as adequacy would need to be determined on a case-to-case basis, and it is unlikely to be based on any standard criteria.
Next steps
While the regulations should not impact UAE headquartered businesses and others with genuine operations in the UAE, there will be reporting and compliance requirements to manage. All UAE entities should analyse the group structure to identify entities in the UAE and other jurisdictions (like the British Virgin Islands and Cayman Islands), which require compliance with their local economic substance regulations. Once it is determined that a UAE/other overseas entity undertakes any relevant activities, businesses would need to assess whether economic substance requirements would be met. Depending on findings of such exercise, remedial options would need to be considered, if necessary.
Nilesh Ashar and Vartika Jain are partner and manager, respectively, at WTS Dhruva Consultants in Dubai. Views expressed are their own and do not reflect newspaper's policy.
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