UAE introduces Economic Substance legislation with aim of EU blacklist removal
In response to the EU blacklisting of the UAE, the UAE has recently published its Economic Substance legislation (Cabinet Resolution 31 of 2019). The legislation entered into force as from 30 April 2019 and was expected for some time. The anticipated removal of the UAE from the EU's blacklist will be welcomed by international investors and financial institutions alike.
The reason why the UAE was blacklisted - as a non-cooperative jurisdiction - is that the EU perceived it as a jurisdiction facilitating offshore structures or arrangements aimed at attracting (overseas) profits which do not reflect real economic activity in the jurisdiction (so-called Criterion 2.2). In a Scoping Paper published by the EU Code of Conduct Group on Business Taxation in 2018, specific substance requirements were provided for companies performing geographically mobile activities. The economic substance legislation which has now been introduced by the UAE is broadly in line with the Scoping Paper.
UAE substance requirements
The legislation prescribes mandatory levels of substance for UAE corporates, including companies, branches and representative offices (including those based in any of the free zones) performing the following activities (the Relevant Activities):
Finance and leasing
Holding company business
Intellectual property holding
The legislation's substance requirements prescribe for corporates in the UAE performing the Relevant Activities to: (i) conduct certain core business activities within the UAE (eg incurring operating expenses and taking relevant management decisions), (ii) have its director(s) and management in the UAE, (iii) have an appropriate number of qualified staff to perform its activities physically present in the UAE, (iv) incur sufficient expenses in relation to outsourcing activities to third parties in the UAE, (v) have sufficient physical assets or an adequate expense level in the UAE, and (vi) control the execution of activities which have been outsourced to third parties.
In order to satisfy the requirement that direction and management of the corporate takes place in the UAE, corporates must ensure that:
the board of directors have quorate meetings in the UAE on frequent occasions;