Whether you are setting up as a Free Zone or an Offshore business in Dubai or anywhere else in the UAE, it needs to comply with the new Economic Substance Rules issued by the UAE government.
The new rules came into effect on 30 April 2019 and it mandates that all in-scope UAE entities operating within its boundaries must meet the newly-defined requirements.
The companies that do not follow these rules would be putting themselves at the risk of facing fines, penalties, suspensions, non-renewal of business licenses or in worst case scenario prohibition from doing business on the UAE soil.
What are the UAE Economic Substance Rules?
- Under the new economic substance rules, a certain type of companies must:
- Be managed from within the country
- They must have a reasonable amount of staff from the UAE
- Most of their revenue (profits, income, investment) must be generated from within the confines of the UAE
- They must retain some of their physical assets in the UAE
- And lastly, they must spend an adequate amount of money on business operations.(operating expenditure)
Who is Bound By the New UAE Economic Substance Rules?
The new rules came into effect on the 30th of April of last year. These rules are applicable to all the onshore and free zone companies currently active or that carry on a ‘Relevant Activity’ in the UAE.
It has not yet been decided if these regulations will also be applicable on sole proprietorships and branch offices, However, –entities incorporated under offshore– Free Zone companies that carry on a ‘Relevant Activity’ in the UAE will be subjected to these rules.
The activities that are considered as ‘Relevant Activity’ in the UAE according to the new Economic Substance Rules are:
- Lease Finance
- Fund Management
- Distribution and Service Centre
- Holding Company
- Intellectual Property (IP)
The companies that either are directly or indirectly owned by the UAE’s Government are exempted from these changes. Based on this exemption, the UAE Sovereign Investment Funds and any other government related entities would also be excluded from the new UAE economic substance rules.
Furthermore, these rules will be less stringent for holding companies – such as those companies that derive equity-based interest income–but if the company is doing some “High-Risk IP Related Activity” then the entity will be subjected to economic substance rules.
Additionally, if a company performs more than one ‘relevant activity’ then the economic substance rules must be met for each of the relevant activities.
Failure to acquiesce with the UAE Economic Substance Regulations can result in fines of up to 300,000 Dirhams!
Read More: UAE Removed From EU’s Blacklist
Why this Sudden Change?
While these rules on the surface may appear to be nothing more than additional red tape that is just there to make business setup in Dubai (and the rest of the UAE) unnecessarily difficult, this is not the case.
The main aim of these new rules is to prevent registration and operation of such companies in the UAE that are solely there to evade taxation from their home countries.
Moreover, this change was implemented by the UAE government to avoid being blacklisted by the EU and to ensure that the country meets the taxation requirements laid out by the OECD. Besides that, the UAE did all that to maintain its reputation for ease of doing business.
The regulations will not have any earth shattering ramifications on the ease of doing business in the UAE. Furthermore, these regulations also will not have any monetary impact, i.e. there will be no additional tax implemented because of these changes.
In case of any queries, feel free to talk with us. At KWS Middle East, we give utmost care to all our clients and provide top-tier business setup services.
Contact us and book your commitment-free call with our elite team today!