Economic Substance Rules – Its affect on UAE business owners

The UAE government in April 2019 had introduced Economic Substance Rules. Companies, both free zone and onshore based ones carrying out relevant activities and registered within the country are active and investing in the country are to abide by the new laws.

Rules had been introduced besides international scrutiny with regards to non-domiciled directors who were using business environment of UAE merely for tax purposes.

But not every business is impacted by the rules. Rather, it is limited to those in the intellectual property, distribution, shipping & holding and finance companies and company headquarters.

Check out what is stated by the rules and how it might affect your business.

Management structure

How the UAE company is owned and managed is considered critical while determining if changes are to be introduced.

Companies essential fall under such rules do require someone to run the business, who should be an UAE resident. He/she is to be C-level executive, either senior management member or managing director.

Regular meetings are to be held in UAE and as evidence written minutes’ are to be used and signed by directors. It is stated clearly within the registration.

For UAE entrepreneurs, what it means? In case, the managing director of your company and yourself are based overseas, then appropriate action needs to be taken quickly.

If there are no seniors residing in the UAE, then it becomes essential to appoint a senior manager here. Otherwise, there is risk of non-compliance (details provided below).

Income generation

It is necessary for affected businesses to ensure generation of company income is done in the UAE. This basically means, work performed, irrespective of client based needs to be completed by the business having physical presence in the UAE.

Besides this, companies are also to ensure incurring of sizeable operating expenses in the UAE.

For UAE entrepreneurs, what does this exactly mean? Main issue on surface is this: in case, if there is business registered here, then there is to be a working office, contributing actively towards the local economy via purchasing activities.

For majority of the companies having office in any country, it is considered to be a fair standard expectation. There is not likely to be any issue, if the business is run in a manner to reflect day to day operations honestly.

Office space & staffing

Organizations operating in above mentioned sectors, according to Economic Substance Rules, are to prove having specific employees working in UAE office. Besides this, there also needs to be adequate office space, so as to accommodate these employees.

According to another rule, companies are to own sufficient physical assets within the UAE. It can be contingent on business operations and hence, revenue.

For UAE entrepreneurs, what does this exactly mean? When right company setup is concerned, there is essential a physical office address. Smaller businesses lying outside Economic Substance Rules may rent out P.O. Box address for business operation purpose in the UAE. But there will be required permanent address for affected companies.

Getting qualified staff is easy in the UAE. There are people coming from across the globe to take full advantage of the tax-free status enjoyed in the nation, combined with favourable climate and high living standards. So, finding business management, operations, skilled finance, etc. is never a problem.

Reporting responsibilities

Affected companies are to provide declaration with the concerned authorities to comply with newly introduced rules stating relevant activities established by UAE government pertaining to original trade license.

Failing to do so will result in facing penalties to about AED 50,000 including repeat offences that may incur much more harsh financial penalties, along with withdrawal or suspension of trade license of the non-compliant company.

For UAE entrepreneurs, what does this exactly mean? How you operate the business is likely to be scrutinized in some manner, if Economic Substance Rules affect your company. But nature of requested information like details involving revenue, profits, registered address, number of employees is likely to be not much complex when compared to anything deemed essential by the licensing or tax authority anywhere across the globe.

Yet in litmus test phase

For Economic Substance Rules in the UAE, it is still year one. Hence, how effectively the regulations are to be upheld is to be seen in the near future. As commitment is made by the government for addressing concerns pertaining to shifting profits, similar to other recognized ‘offshore tax havens’ to prevent EU’s tax blacklisting, transparency is stated to be the only major issue faced here.

If you are eager to set any type of business here within the UAE, then it is essential to understand in full the regulations and rules to be adhered to pertaining to the company type desired to be incorporated. There is plenty of advice readily available and it will be worth to discuss with an expert to know the obligations, if any present, behind opportunities planned to pursue.

For UAE entrepreneurs, what does this exactly mean? Despite such regulatory developments taking place, if you plan to start any new business or relocate the existing one here, then you can enjoy tax-free corporate environment benefits among the world’s most preferred lifestyle and business destinations.

With all things being taken into consideration, red tape (minimal) essential for setup here is likely to be worth the try. Business owners interested to work, live as well as invest legitimately in the UAE do not have to worry much.

Originally posted 2021-09-29 05:10:07.