Deadline for filing the notification - 30 June 2020
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, the UAE introduced various Federal Legislation including:
- On 30 April 2019, the Economic Substance Regulations were issued (Cabinet of Ministers Resolution No. 31 of 2019).
- On 11 September 2019, the UAE published guidance regarding the Economic Substance Regulations (Ministerial Decision No. 215 for the year 2019).
The above legislation applies across the whole of the UAE, both onshore and Free Zones, including Ras Al Khaimah International Corporate Centre (“RAK ICC”).
Economic Substance for RAK ICC entities
Recently, RAK ICC issued specific guidelines on Economic Substance Regulations applicable to all RAK ICC entities. The regulations, which apply to financial years commencing on or after 1 January 2019, mandate RAK ICC entities that undertake “Relevant Activities” to demonstrate” Economic Presence” in the UAE in relation to the activities they undertake.
The Regulations apply to RAK ICC entities 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.
Please note it is important to analyse 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.
The guidelines issued by RAK ICC defines the concept of ‘Parent company’ and ‘Ultimate Parent Company’ unlike the Economic Substance Regulations regulations issued by the UAE Ministry of Finance which only provides the definition of ‘Ultimate Beneficial Owner’.
The Parent Company under the RAK ICC guidelines is defined as the entity that directly:
- Holds most of the voting rights in the Entity; or
- Has the right to appoint or remove most of the board of directors of the Entity; or
- Controls alone, pursuant to a joint arrangement with the shareholders or members, most of the voting rights in the Entity; or
- Has the right to exercise, or exercises, dominant direct influence or control over the entity.
The Ultimate Parent Company under the RAK ICC guidelines is an entity of the group that:
- Owns directly or indirectly a sufficient interest in the Equity, such as it is required to prepare consolidated financial statements under accounting principles generally applied in its jurisdiction of tax residence; and
- There is no other entity of such group that owns directly or indirectly an interest described above in the first mentioned entity.
As per the guidelines introduced by the UAE Ministry of Finance, 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 actually being undertaken by the entity.
Economic Substance Test for RAK ICC entities:
In order to meet the Economic Substance Test, a RAK ICC entity needs to demonstrate all three of the following conditions:
- Adequate employees, physical assets and expenditure in the UAE
- Core Income Generating Activities (“CIGAs”) are undertaken in the UAE
- Directed and managed in the UAE
However, in case the above activities have been outsourced by the RAK ICC entity, it is important that the RAK ICC entity demonstrates adequate supervision of the outsourced activities.
Next Steps for RAK ICC entities:
Following the recent guidelines from RAK ICC, all RAK ICC entities are required to:
- File a notification by 30 June 2020 through the Economic Substance Notification tab available in RAK ICC’s “Agent Portal” from 29 March 2020 onwards.
RAK ICC entities are required to provide the following information:
Entity Details:Entities are required to provide the registered office address; certificate of incorporation/commercial license/trade license/permit number; legal form/company type; financial year/accounting reference period
Reportable Period:Entities are required to indicate the start and end date of the relevant financial period
Relevant Activities:Entities are required to provide information (i) whether they carried out a Relevant Activity; (ii) indicate whether the entity earned income from the Relevant Activity during the reportable period; and (iii) indicate whether the gross income from each Relevant Activity was fully or partially paid, subject to tax in a jurisdiction other than the UAE.
Additional Information:Entities need to confirm (i) whether its share capital is at least 51 percent owned by the UAE Federal Government, the Government of an Emirate, or any governmental authority of body of the UAE Federal or an Emirate Government in order to claim an exemption from the filing of Economic Substance Return; and (iii) whether the entity is a tax resident outside the UAE during the reportable period
Declaration:Entities are required to provided details of the dedicated contact person which can include a representative of the registered agent; an entity official; or the compliance officer
Return/ Report Deadline – 31 December 2020
- Return/ Report filing requirement applies to RAK ICC entities that undertake a Relevant Activity
- RAK ICC entities 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
A RAK ICC entity would be liable to an administrative penalty of AED10,000 - AED50,000 if it either fails to provide required information or knowingly provides inaccurate information. Penalties will also increase to between AED50,000 and AED300,000 in the subsequent year(s) of non-compliance.
Failure to comply may also lead to administrative action including potential suspension, revocation, or non-renewal of its registration.
How GT can assist:
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 RAK ICC