ESR UAE: Setting up your company in line with UAE economic substance rules
Whether you’re setting up as an onshore or free zone business, a multinational company or a one-man band: if your company plans to carry out one of numerous ‘relevant activities’ here in the UAE, it must meet new economic substance rules.
In short, certain types of companies must:
- Understand who this effects
- Be managed or directed from within the UAE
- Have adequate UAE-based full-time staff
- Generate most of its income here
- Maintain adequate assets and demonstrate adequate operating expenditure here
As a new business owner, these rules can appear confusing. So here’s what you need to know before you incorporate.
Compliance – who does it affect?
The new regulations came into effect on 30 April this year and will start investigating company from their first year of operation. They apply to companies that operate in the below industries:
- Lease financing
- Fund management
- Distribution and service centres
- Shipping companies
- Holding companies
- Company headquarters
- Intellectual property businesses
Companies active in these sectors are considered ‘relevant entities’ and must comply with economic substance regulations.
However, allowances will be less stringent for those managing holding companies (such as those that only derive equity-based interest income) and additional requirements apply to anything related to high-risk intellectual property.
Failure to comply with the economic substance regulations can result in fines of up to AED 300,000, so it’s important you know the rules.
While these new rules may appear to be additional red tape, the main aim is to prevent non-domiciled directors, who register and operate companies here in the UAE, from tax evasion in their home nations.
They’re also part of efforts by the UAE government to avoid being blacklisted by the EU as ‘non-cooperative’ and to ensure the nation fully meets OECD taxation requirements and retains its excellent reputation for ease of doing business.
Manage your business from within the UAE
When incorporating in the UAE, one of the first things you’ll need to do as a business owner is to apply for a trade license – either from the free zone you want to set up in, or from the mainland’s Department of Economic Development (if you wish to conduct business with UAE-based companies).
However, under the new economic substance rules, regardless of which type of business you run and which area it’s based in, your managing director or one of your company’s senior management team must be based in the UAE. This means they need to operate from here on a full-time basis – for the specific activity that the business is licensed to trade in.
This is true no matter the size of your business. If you have a board, this means that meetings need to take place in the UAE. You’ll also need to be able to demonstrate these have been held on a regular basis – complete with ‘minutes’ to evidence this requirement. However, they are yet to specify the template for these ‘minutes’.
Employ full-time staff in the UAE
Aside from being based here yourself – which is a given if you’re a sole trader incorporating in the UAE – if your business falls into the ‘relevant entity’ category you’ll need to consider how you’re going to staff your new business.
While economic substance rules stipulate the need for ‘qualified’ employees, the term itself is open to interpretation in terms of the level of experience actually needed. Nor is a minimum number of full-time employees specified.
However, what is made clear is that employees need to be physically present– regardless of the type of contract they have with your business. There is a way round this by outsourcing some of your work, but you must be able to prove the reasons behind this and provide a basis of whether the outsourced third party has adequate resources for carrying out the relevant activity.
Ensure your main income is generated within the UAE
One of the main attractions of starting a business within in the UAE is its international atmosphere and its proximity to Europe, Asia, and the wider MENA region.
While not all of your clients need to be based locally (in fact they can’t be if you run a free zone business) the economic substance rules suggest that the actual work should be conducted from within the UAE. That is to say, your client can be based overseas but your main place of work – and the location where it’s carried out – should be here.
For example, in the case of shipping companies it means activities such as hiring, paying and overseeing crew members and overhauling ships should be conducted by a ‘licensee in the state’ – in other words, someone holding the correct government-issued trade license.
Own assets and spend on local business services
The UAE’s income and corporate tax-free environment attracts all kinds of businesses and services.
As a result, entrepreneurs setting up here have hundreds of potential suppliers and third party providers to work with – right on their doorstep.
The economic substance rules are mindful of this and make it a requirement that relevant entities incur an adequate amount of operating expenditure in the UAE. However, it’s unclear exactly what ‘adequate’ means (in terms of a percentage or specific monetary value).
Similarly, there’s no real clarity around ‘asset ownership’. While it can be presumed that this means that a relevant company will need to declare its assets as part of the rules, there will almost certainly be further clarification from the UAE government in due course.
While no means unique in its efforts to offer greater financial transparency, the UAE is one of numerous tax-free or low tax countries that have put similar laws into practice this year – including the Bahamas, Cayman Islands, British Virgin Islands, Mauritius, Seychelles, Jersey, Guernsey, the Isle of Man, and Bermuda.
As the UAE looks towards its future as an international incorporation destination, it aims to maintain its high regard as one of the easiest countries in the world to do business in.
To find out more about the economic substance rules and how they might impact your business or license requirements, contact BIZ today and the team can explain what you need to do as a new business owner to meet these regulations.