What is Economic substance regulation in the UAE?
There's a new regulation applicable in the UAE with the Fed from the year 2019. This law is suitable for 13 companies, and it’s not relevant to all companies in the UAE. It is appropriate for individual companies which are Louis specific activities.
This law released in 2019, and hence you have a company which is coming under this law has to report to authorities in the year 2020 before learning what economic substance regulation is. Let us understand the background of why economic substance regulation is in the UAE.
UAE is the place where a lot of cross-border transactions are happening to understand why economic substance revolution is applicable in the UAE. It is better to know how cross-border transactions occur in the world.
I want to explain this one with an example. It country in country e there is a company it is buying goods from another country and supplying products to another country. For example, suppose it is hiring for the dollar and selling for two hundred dollars, it's making a profit hundred dollar as an item made.
Suppose this company has got a related party or subsidiary in another country. It may procure the same goes for a hundred dollars and sell for a hundred and ten. By keeping a margin of Ten dollars in the first country, second countries procuring four hundred and ten. Of course, then it will sell to the customer in customer for two hundred dollars keeping your margin, keeping a profit of ninety dollars.
So earlier the first country was keeping a profit of a hundred dollars nowhere the first country is keeping ten-dollar as a margin and the second countries keeping a tremendous amount of money, and that is 90 dollar.
You'll see how profits should spread from one country to another. Now let us understand how states have to control this kind of transactions. Let us know what is, or you see the Organization for Economic Co-operation and Development.
It's an organization which is formed by major countries in the world in 1961. We should understand why this BEPs Base Erosion and Profit Shifting. BEPs have introduced 15 action plans to address international tax issues.
The object is of the action plan is to make sure that there is no tax avoidance at the cross that cross-border transactions. Now let us understand what all those 15 action plans introduced by BEPs. Seeing that UAE, a member of the BEPs inclusive framework that means UAE has to play with the minimum for action plans.
Action one is harmful tax practices, number six prevention of tax treaty abuse, activity 13 Country by country reporting and action 14 mutually determined procedure. Out of this UAE has introduced economic substance regulation that is
5. Harmful Tax PracticesÂ
13. Country by country reportingÂ
That also introduced in the year 2020. Along with the UAE, Eleven other countries also introduced economic substance regulation in the year 2019.
See the list out of this you can identify one country which is very familiar to you. That is nothing other than Bahrain. One of the UCC members sees the list of countries. That is the list of non-cooperative jurisdiction which is at least by the European Union recently.
What action UAE has taken to manage the recruitment of OECD, and European Union UAE Joined in BEPs inclusive framework. On 16th to meet on the 18th later in 2019 UAE released two laws.
- Cabinet resolution number thirty one that makes economic substance regulation
- Cabinet resolution number 32 that is country by country reporting
By introducing loose two laws UAE complaint with the requirement of European Union as a member in BEPs inclusive framework or company is registered in the UAE. Which are doing certain activities which are of course relevant activities even they are doing those related activities? They have to comply with economic substance regulation—the companies which are doing certain events that have all the relevant activities under economic substance regulations.
Those companies should come to play with the regulations from the 2019 numbers. They have to report to the authorities with that from 2020.
Basis of Economic Substance RegulationÂ
I explained why economic substance regulation is in the UAE was a background behind this. Today in the article we are going to learn why and how I'm to whom economic substance Revelation is applicable.
Let us understand what ESR the objective of this law is that if any business is conduct in the UAE. There should be an economic effect and substantial purpose in the UAE. It for the transactions what is happening in the UAE should have real work and actual existence in the UAE itself.
So the ESR will ensure that substantial purpose and economic effectors in the UAE. Why ESR regulation in the UAE there are three reasons
1.     Being a BEPS inclusive framework member, UAE has to comply with the European Union's regulations
2.     It is helping the country to improve International competency.
3.     Investment in the UAE is not taking the benefit from a privileged tax regime was the source of information on economic substance regulation in the UAE.
The cabinet resolution 31 released on April 29, after that cabinet decision 58 released on September 4, 2019, and ministerial decision number 205 released on September 11, 2019, to whom this law applies.
This law applies to all license holders, whether it is a natural person or judicial person who's doing a relevant activity in the UAE. In the UAE means it can be in the UAE in the mainland free zone or financial prisons. The law applies to or commercial license holders or certificate of incorporation holders or any other permit holders who are doing relevant activities.
Some companies are exempted from this regulation even though they are doing relevant activities. Which are companies a company which 51% two or more shares are held by the federal government or state government or any of the authority or body of national or emirates?
If such companies are they are exempt from this revelation, what are the relevant activities under the regulation? There are nine activities listed in the law which considered as related activities. They are
- banking insurance
- investment
- fund management
- lease finance
- headquarters
- holding company
- shipping companies
- intellectual-property business
- distribution and service centre