TAX UPDATE

Economic Substance Requirements in the UAE for DIFC Entities

Background

As a member of Organization for Economic Development and Cooperation (OECD), and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group, the UAE has committed to ensuring standards related to Base Erosion and Profit Shifting (BEPS) are implemented.  

During 2019, UAE introduced various Federal Legislation including:  

  • On 30 April 2019, UAE Cabinet of Ministers Resolution No. 31 Of 2019 was introduced concerning Economic Substance.
  • On 11 September 2019, Ministerial Decision No. 215 for the year 2019 providing guidance on Cabinet Decision No.31 of 2019 was introduced. 

The above legislations apply across the whole of the UAE, including all Free Zones and Financial Free Zones (such as the Dubai International Financial Centre). 

 

 

Economic Substance for Dubai International Financial Centre (DIFC) entities

On 17th December 2019, the DIFC issued specific guidelines on Economic Substance Regulations applicable to all DIFC entities including private companies, public companies, partnerships (LLP, LP & GP), Foundationsnon – profit organization, and branches established in the DIFC.  

 

 

The Regulations apply to DIFC Licensees:

  • that earn income from one or more Relevant Activities. Relevant activities being banking, Insurance, Investment Fund management, Lease, Headquarters, Shipping, Holding, Intellectual Property, Distribution and Service Centre Businesses
  • for financial years commencing on or after 1 January 2019 

 

Please note it is important to analyze and conduct an impact assessment of the businesses activities in order to determine whether the business falls under the purview of Economic Substance Requirements in the UAE.  

As per the guidelines introduced by the DIFC, in order to determine whether a Relevant Activity is taking place, a substance over form approach should be followed.  This means looking beyond what is stated on the commercial license to what activity is being undertaken by the entity.  

 

 

Economic Substance Test for DIFC entities:

In order to meet the Economic Substance Test, a DIFC Licensee needs to demonstrate all three of the following conditions: 

  • Adequate employees, physical assets & expenditure in the UAE
  • Core Income Generating Activities (“CIGAs”) are undertaken in the UAE
  • Directed and managed in the UAE 

Next Steps for DIFC entities:

ALL DIFC entities are required to: 

  • Notify the DIFC Registrar of Companies (RoC) that they undertake a Relevant Activity 

Notification Deadline – 31 March 2020

  • Notification requirement applies to ALL DIFC entities (regardless of whether they conduct a Relevant Activity)  
  • All existing DIFC entities with financial year end 31 December 2019 must file the notification with the RoC on the DIFC Client Portal by 31 March 2020 

Return/ Report Deadline – 31 December 2020 

  • Return/ Report filing requirement applies to DIFC Licensees that undertake a Relevant Activity    
  • DIFC Licensees that undertake a Relevant Activity with financial year end 31 December 2019 must submit the Return/ Report by 31 December 2020 i.e 12 months after the financial year end 

 

 

Penalties for Non – Compliance

  • Non – Submission of Notification: Penalty of AED10,000 - AED50,000 
  • Provision of inaccurate or incomplete information: Penalty of AED10,000 - AED50,000; and Deemed failure to demonstrate economic substance in the UAE 
  • Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year: 
  • First year of failure, penalty of AED 10,000 – AED 50,000 Information exchange with foreign competent authority of: 
    • parent company; 
    • ultimate parent company; and 
    • ultimate beneficial owner 
  • Second consecutive year of failure, information exchange (see above) 
  • Penalty of AED100,000 – AED300,000; and  
  • Commercial license could be: suspended, withdrawn or not renewed

How can Grant Thornton help

In this regard, the tax team at GT is extending its support to all businesses in conducting:  

  • Economic Substance Impact Assessment for UAE entities
  • Assistance in Filing Economic Substance notification
  • Assistance in Filing Economic Substance Return/ Report with the DIFC 

Further, GT will be organizing a seminar on Economic Substance Regulations on 2nd March 2020, for which details will be circulated soon  

Please note DIFC is the only Regulatory Authority which has introduced Economic Substance Regulations specific to DIFC Registrar of Companies. However, the Economic Substance Regulations apply to all entities in the UAE.  

For further clarification and details regarding the above Tax Alert, please feel free to contact Steve Kitching, our Tax Partner, supported by Amisha Anil, Assistant Manager.