The United Arab Emirates approved the Act on the economic substance on its territory, which allowed the jurisdiction to avoid being in the blacklist of the European Union. The announcement of this document created serious tension among entrepreneurs and companies working in the UAE since before its adoption the country was considered one of the most attractive from the point of view of economic substance.
Economic Substance Tests
The Act on Economic Substance applies to onshore companies in the Emirates, as well as to organizations that are members of special economic zones in the jurisdiction. Requirements are presented to legal entities that work in the following industries:
-
Banking sector;
-
Investment funds management;
-
Insurance activity;
-
The financial industry, leasing services;
-
Service, distribution sphere;
-
Management of groups of companies;
-
Holdings;
-
Intellectual property;
-
Maritime shipping.
Companies operating in the UAE
are required to fulfill all the requirements of Economic Substance. For this, special testing will be carried out concerning legal entities. What are tests for organizations, and what do they include?
1. Checking the conformity of the sphere of activity that generates income
1. Checking the conformity of the sphere of activity that generates income
-
A company is considered to have passed the test if business activity complies with the list of Relevant Activities. Sources of income of a legal entity must correspond to the articles indicated in the table:
Activity
Revenue item
Banking sector
-
Raising capital.
-
Risks management.
-
Capital Management.
-
The activities of hedge funds.
-
Lending.
-
Preparation of reports for internal users of the company or state regulatory authorities.
Insurance
-
The provision of insurance services.
-
Primary insurance or reinsurance.
-
Risk analysis.
Investment fund management
-
Making key decisions on the sale or refusal to sell shares, securities.
-
Risk accounting.
-
Accounting for reserves.
-
Monitoring hedging positions, analyzing the situation regarding changes in exchange rates, etc.
-
Reporting for internal users, customers or regulatory authorities of the UAE.
Financial industry, leasing services
-
Consulting.
-
Search and acquisition of property for subsequent lease or leasing.
-
Determination of the conditions for the provision of property for rent.
-
Definition of terms for the provision of property for rent.
-
Revision of leasing agreements.
-
Risk analysis.
Management of groups of companies
Activities in one of the areas:
-
Management decisions.
-
Expenses on behalf of a group of companies.
-
Coordination of the work of organizations.
Maritime shipping
-
Hiring a ship crew, monitoring activities, paying salaries;
-
Maintenance and transportation of ships;
-
Supply chain control;
-
Definition of product groups and terms of their delivery;
-
Crossing control.
Service, distribution sphere
-
Delivery and storage of goods for sale.
-
Inventory control.
-
Processing requests.
-
Consulting clients.
Holdings
Legal entities that receive income from changes in the prices of securities of other organizations. Such legal entities should not conduct commercial activities.
Intellectual property
Profit from the following types of intellectual property:
-
Patents;
-
Technical innovation;
-
Copyrights;
-
Brand rights;
-
Marketing rights, etc.
-
2. Verification of company management
2. Verification of company management
-
A company is considered to have passed the test under the following conditions:
-
The legal entity holds most of the meetings of the board of founders in the territory of the Emirates;
-
The turnout at meetings exceeds the quorum requirements, the documents have the signatures of the founders;
-
Governing сouncil decisions are included in the minutes;
-
The qualifications of the members of the board of directors comply with the requirements of the UAE;
-
The documentation must be stored in the archives of the UAE.
If the test for economic substance is conducted in relation to the representative office of a foreign company that does not have a governing council, the head of the organization must make all key decisions regarding the activities of the legal entity, being directly in the UAE.
-
3. Personnel costs and company assets
3. Personnel costs and company assets
-
A company is considered to have passed the test if:
-
Representatives of the company's staff are situated in the UAE in sufficient quantity;
-
The costs of a company in the Emirates comply with the requirements of the jurisdiction;
-
The company owns or leases office premises in the required quantity for conducting business.
-
Requirements for holding companies
Requirements for holding companies
-
Since holding companies do not conduct commercial activities, the requirements of economic substance differ for them. Such companies are considered tested in the following cases:
-
Company statements and other documents to the regulatory authorities were submitted on time and executed following the requirements of the UAE;
-
The company has the staff and office space in the required quantity.
These requirements apply only to legal entities that receive profit from capital gains and dividends. For holdings doing business, standard rules apply.
-
Compliance with Economic Substance
Compliance with Economic Substance
According to the provisions of the document, companies are required to file notifications with regulatory authorities in the following cases:
List:
List:
-
-
Conducting or completing work in areas falling within the scope of the act of economic substance;
-
A report on taxation outside the UAE of capital that was earned by a company in a jurisdiction;
-
On the completion of the financial period of a legal entity.
The Act on Economic Substance provides passing the test for companies that conduct the relevant activities, only after submitting the financial report. This must be done no later than 12 months after the end of the internal financial period of the legal entity.
-
A test for the economic substance of companies conducting relevant activities in the UAE will be required to pass annually.
Sanctions for non-compliance with the provisions of the act
Sanctions for non-compliance with the provisions of the act
The act provides some fines that may be issued to companies that do not fulfill the requirements. Sanctions against a legal entity are applied in the following cases:
List:
List:
-
-
If the legal entity refuses to pass the test;
-
In case of failure to submit or untimely submission of information to regulatory authorities;
-
When submitting incorrect information.
In addition to fines, regulatory authorities may also apply other sanctions to legal entities.
In case of the first violation: 10,000 - 50,000 dirhams ($ 2,700- $ 13,600);
In case of repeated violation: 50,000 - 300,000 dirhams ($ 13,600 - $ 81,600).
If the company fails the test for any reason, the fines will be as follows:
-
For example, departments have the right to exclude a legal entity from the register or revoke a license to carry out any type of activity.
Law&Trust will help to conduct activities
Law&Trust will help to conduct activities
in line with new requirements for economic substance in the UAE
The UAE has taken the best possible measures to prevent the inclusion of the jurisdiction in the"blacklist of the European Union. At the same time, the steps taken should not affect the attractiveness of the jurisdiction. Companies are likely to adapt to the changed requirements, rent offices, look for employees with relevant qualifications, etc.
However, it is quite expensive. If you don’t want to allow unnecessary costs, Law&Trust offers its services.
With the services of Law&Trust, your company will be able to continue to operate in the UAE without the undue cost of meeting the requirements of an economic substance. So how can you save?
First of all, legal entities can order services for conducting related activities from a third-party company and get them outsourced. The conditions for this are as follows:
-
The legal entity fully controls the activities of outsourcers and the provision of services by them;
-
The outsourcer works in the UAE jurisdiction;
-
The outsourcing company provides an economic substance that is not considered when providing services to other organizations.
Law company Law&Trust offers outsourcing services, which will help to avoid the need for hiring personnel, renting offices, etc. We offer four service packages.
Consider the service packages in more detail:
|
Package of services |
Service provision |
Description |
|
Classification |
Classification of activities of a legal entity |
The client submits a special form. Based on the information received, Law&Trust prepares a report that contains information about the company's activities and its compliance with economic substance. |
|
Legal & audit report |
Preparation of a legal or audit report by specialists from the Emirates |
Law & Trust reviews the investment portfolio, provides a legal or audit report. The lawyer of the company advises the client on issues of interaction with government bodies. |
|
Company presence in the UAE |
Provision of a director, offices outsourcing, a ready solution for hiring staff. |
The office of an outsourcing company is considered the office of the client. The organization has the right to provide decisions on personnel hiring, including directors, employees, other persons. |
|
Reporting |
Submission of company status information to the regulatory body |
The outsourcing company registers the client’s legal and submits all necessary reports |
The benefits of outsourced collaboration
Law & Trust will do everything possible to fulfill the requirements for economic substance. Collaborating with us, you will receive the following benefits:
-
You save money on renting premises and hiring employees;
-
Your company has the ability to conduct all business processes in the same mode;
-
Saving time, you do not have to waste time registering in the UAE.
If you have any questions, call or write to us. Law&Trust lawyers will tell you about all the features of the service, costs and help you choose the right package of services.
Our clients
Our team
Victoria Zhelezova
Branch Director, HR
Read more
Dariia Grib
Legal secretaries & Receptionists
Read more
