As a part of international tax planning, companies especially multinational groups tend to shift profit from high corporate tax jurisdictions to low tax jurisdictions to maximize overall group profit. UAE has no corporate income tax and has very low rate for VAT i.e. 5%. This makes UAE a favorable profit shifting destination for multinationals.
UAE is a member of OECD Inclusive Framework on Base Erosion and Profit Shifting and issuance of economic substance regulation is the result of compliance with the requirement of this framework. These regulations were initially issued on 30th April 2019 but have been recently modified on 10th August 2020 and updated guidance is also issued.
These regulations apply to financial year commencing on 1st January 2019 and focus on certain activities to ensure UAE companies whether main-land or free zone carrying on those activities should show adequate economic presence in the UAE. The list of activities is given below:
• Banking Business
• Insurance Business
• Investment Fund management Business
• Lease - Finance Business
• Headquarters Business
• Shipping Business
• Holding Company Business
• Intellectual property Business (“IP")
• Distribution and Service Centre Business
There are two filing requirements under the Regulations and to be filed with respective regulatory authorities:
(i) Notification form (To be submitted within 6 months of end of financial year)
(ii) Annual substance return (To be submitted within 12 months of the end of financial year)
Federal Tax Authority is designated as National Assessing Authority under these regulations which will determine that the company carrying on relevant activities has economic substances in the UAE.