Economic Substance UAE

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 fulfil all Economic Substance requirements. For this purpose, special tests will be carried out for legal entities. What are the tests for organisations and what do they include?

1. Checking the appropriateness of the area of activity that generates income.

A company is considered to have passed the test if the business activity corresponds to the list of Relevant Activities. Income items of the legal entity must correspond to the items specified in the table:

Activity	Income items
Banking sector	Capital Raising. Risk management. Capital Management Hedge Fund Activities. Lending. Preparation of reports for the company's internal users or government regulatory authorities.
Insurance activities	Provision of insurance services. Primary insurance or reinsurance. Analysis of risks.
Investment fund management	Taking key decisions to sell or refuse to sell shares, securities. Risk management. Accounting of reserves. Controlling hedging positions, analysing the situation regarding changes in exchange rates, key rates, etc. Preparing reports for internal users, clients or UAE regulatory authorities.
Financial industry, leasing services	Consulting activities. Search and acquisition of property for further rent or leasing. Determination of the terms of leasing the property. Determination of terms of property leasing. Revision of leasing agreements. Risk analysis.
Management of a group of companies	Activities in one of the following areas: Management decisions. Expenditure on behalf of the group of companies. Coordination of the work of the organisations.
Maritime shipping	Hiring of ship's crew, control of activities, payment of salaries; Maintenance and transport of ships; Supply chain control; Determination of commodity groups and delivery dates; Voyage control.
Service, distribution area	Delivery and storage of goods for sale. Controlling the stock of goods. Processing of orders. Customer counselling.
Holding	Legal entities that derive income from changes in the prices of securities of other organisations. Such legal entities must not carry on commercial activities.
Intellectual property	Profit from the following types of intellectual property: Patents; Technical innovations; Copyrights; Brand rights; Marketing rights, etc.

2. Verification of the company's management

The company is considered to have passed the test if the following conditions are met:
- The legal entity holds the majority of its board meetings within the territory of the UAE;
- Attendance at meetings exceeds quorum requirements, and the documents bear the signatures of the founders;
- Decisions of the board of directors are recorded in the minutes;
- The qualifications of the board members meet UAE requirements;
- Documentation subject to retention must be stored in archives located in the UAE.
If the Economic Substance Test is conducted in relation to a branch of a foreign company that does not have a board of directors, the person in charge of the entity must make all key decisions regarding the entity’s activities while being physically present in the UAE.

3. Expenditures on Staff and Company Assets

A company is considered to have passed the test if:
- An adequate number of company personnel are physically present in the UAE;
- The company’s expenditures in the UAE meet the requirements of the relevant jurisdiction;
- The company owns or rents sufficient office space necessary for carrying out its activities.

Requirements for holding companies

Since holding companies do not conduct commercial activities, the Economic Substance requirements for them differ. Such companies are considered to have passed the test in the following cases:
- The company’s reporting and other documentation have been submitted to the relevant authorities in a timely manner and in accordance with UAE regulations;
- The company has an adequate number of employees and sufficient office premises;
These requirements apply only to legal entities that earn income from capital gains and dividends.

Holding companies engaged in commercial activities are subject to the standard rules.

Compliance with the Economic Substance Regulations

In accordance with the provisions of the regulations, companies are required to submit notifications to the relevant authorities in the following cases:

List:

Commencement or cessation of activities falling within the scope of the Economic Substance Regulations;
Reporting of taxation outside the UAE on income earned by the company within the jurisdiction;
Completion of the financial period of the legal entity.

The Economic Substance Regulations require companies conducting Relevant Activities to undergo the Economic Substance Test only after the submission of their financial report. This must be done no later than 12 months after the end of the entity’s financial year.

Companies conducting Relevant Activities in the UAE are required to undergo the Economic Substance Test on an annual basis.

Penalties for Non-Compliance with the Regulations

The Regulations provide for a range of penalties that may be imposed on companies that fail to meet the requirements. Sanctions may be applied in the following cases:

List:

Refusal of the legal entity to undergo the Economic Substance Test;
Failure to submit, or late submission of, information to the relevant authorities;
Submission of false or inaccurate information.

If a company fails the test for any reason, the following penalties apply:

First violation: AED 10,000 – AED 50,000 (approx. $2,700 – $13,600);
Repeated violation: AED 50,000 – AED 300,000 (approx. $13,600 – $81,600).

In addition to financial penalties, regulatory authorities may impose other sanctions on the legal entity.

Regulatory authorities also have the right to remove a legal entity from the register or revoke its license to carry out a particular type of activity.

Law&Trust will help you conduct your business in compliance with the new Economic Substance requirements in the UAE.

The UAE has taken all possible measures to avoid being included on the EU blacklist. At the same time, these measures are designed not to undermine the attractiveness of the jurisdiction. Companies are expected to adapt to the updated requirements, including renting office space, hiring qualified personnel, and so on.

However, this can be quite costly. If you wish to avoid unnecessary expenses, Law&Trust offers its services. With the support of Law&Trust, your company can continue operating in the UAE without excessive spending on fulfilling Economic Substance requirements. So, how can you reduce costs?
Primarily, legal entities may outsource Relevant Activities to a third-party service provider.

The following conditions must be met:

The legal entity retains full control over the outsourced activities and the delivery of services;
The outsourcing provider operates within the UAE;
The service provider ensures Economic Substance that is not allocated to the services rendered to other entities.

Law&Trust, as a legal services provider, offers companies outsourcing solutions that eliminate the need to hire staff, rent office space, and so on. We offer four service packages.

Let's look at the packages in more detail:

Service package	Provision of service	Description
Classification	Classification of the activities of a legal entity	The client submits a special questionnaire. From the information received, Law&Trust prepares a report containing information on the company's activities and its compliance with the Economic Substance.
Legal, audit opinion	Preparation of a legal or audit opinion by specialists based in the UAE.	Law&Trust conducts a review of the investment portfolio and provides a legal or audit opinion. The company’s legal expert advises the client on matters related to interaction with government authorities.
Company presence in the UAE	Director provision, office outsourcing, recruitment solution.	The office of the outsourcing company is considered to be the office of the client. The organisation has the right to provide solutions for the appointment of personnel, including director, employees, other persons on an outsourced basis.
Filing of reports	Filing information about the company's status with the regulator	The outsourcing company registers the client's legal entity and files all necessary reports

Benefits of outsourcing cooperation

Law&Trust will do everything possible to ensure that the client meets the Economic Substance requirements. By contacting us, you will benefit from the following:

The client saves money on office rent and employee hiring;
The company can continue conducting all business processes as usual;
Time savings, as the client won’t need to spend time on registration in the UAE.