Economical Substance in the UAE

On April 30, 2019, the UAE Cabinet of Ministers adopted a resolution dedicated to the so-called “Substance” - an economic presence. According to the decree, any companies, regardless of whether they are residents of free economic zones or not, which carry out certain activities, must comply with the new requirements for compliance with the economic presence in the UAE.

These types include

  • Holding activity
  • Distributors and services,
  • Banking,
  • Insurance,
  • Investment fund management,
  • Finance and leasing,
  • Activities as the head company of the group,
  • Shipping,
  • Ownership and development of the intellectual property.

A company carrying out one or more of the above activities needs to pass the following three tests in order to meet its economic presence requirements:

  1. The effective management body of the company must be located in the UAE,
  2. The main activity of the company, which makes a profit, should be carried out in the UAE,
  3. The company must have an adequate level of qualified staff, annual expenses and premises.

Companies can outsource their business to generate income, provided that (1) the company retains full control over this activity, (2) the person carrying out work on conducting regulated activities carries out such activities in the UAE and (3) this activity does not fall under the definition of “high-risk intellectual property”.

High-risk intellectual property is such intellectual property that was not created by the person performing the regulated activity but was acquired from an affiliate or used under a license issued by one or more affiliated persons.

A company carrying out the above activities must, within twelve months from the end of the fiscal year, submit to the regulatory body a report that should demonstrate that such a company meets the criteria for economic presence. The regulator then submits a report to the UAE Ministry of Finance.

Non-compliance with the rules of economic presence entails bringing to administrative responsibility in the form of a fine (up to 50,000 dirhams for the first financial period and up to 300,000 dirhams in subsequent financial periods). Potential deregistration is also provided.

Law and Trust International provides an opportunity to register a company in the UAE. To learn more about the cost and features of registration, please contact our lawyers.