Background:
The UAE has signed the Inclusive Framework (IF) of the Organization for Economic Co-operation and Development’s (OECD) on Base Erosion and Profit Shifting (BEPS)in May 2018. As a result, the UAE was committed to introduce the following BEPS minimum standards:
- BEPS Action 5: Countering Harmful Tax Practices, considering transparency and substance
- BEPS Action 6: Preventing the granting of Treaty benefits in Inappropriate circumstances
- BEPS Action 13: Transfer Pricing Documentation and Country by Country Reporting
- BEPS Action 14: Tax Dispute Resolution
The United Arab Emirates (UAE) has issued the Cabinet Resolution No. 31 of 2019 introducing the Economic Substance Regulations (ESR). The introduction of the UAE Economic Substance Regulations was an important step to fulfill the UAE commitment towards BEPS minimum standards, to align the UAE tax regime with the global tax best practices and also to implement the directives OECD BEPS project.
Scope of ESR:
The purpose of the UAE Economic Substance Regulations is to establish specific requirements for businesses to demonstrate their actual economic activity in the UAE and also to prove that the incorporation in the UAE was not driven solely to benefit from the “Low, or No” tax regime. Businesses which are incorporated in the UAE and operating in any of the following activities are required to comply with the UAE ES regulations
a) Banking
b) Insurance services
c) Investment fund management
d) Finance leasing
e) Headquarter activities
f) Shipping
g) Holding company
h) Intellectual property (IP)
i) Distribution and services center activities
The Substance Test: Essentially, the economic substance test is based on three common key tests that businesses need to comply with, which are:
1) The Directed and Managed Test: Company should be directed and managed from the UAE;
2) The Core Income Generating Activity (CIGA) Test: Income Generating Activity (CIGA) related to the business activities should be undertaken in the UAE.
3) The adequacy test: An adequate number of qualified employees, office space and annual expenditures in the UAE.
