The United Arab Emirates is perhaps one of the most advanced jurisdictions in today’s highly regulated and bureaucratic business environment.  In terms of substance, the UAE has long implemented cost-effective and accessible programmes and packages backed by state-of-the-art-infrastructure to help foreign investors build a solid physical presence in the country, years before other jurisdictions and regulatory bodies started considering the concept.   Upon registration of a UAE company, our firm as a licensed registered agent with pro-active assistance of the local government can help you seamlessly set up a failproof foundation for your business that will have all the necessary aspects to secure a tax residency in a highly esteemed, white-listed, zero-tax jurisdiction that will not be challenged by foreign authorities or fall subject to negative reputation. 

To simplify the compliance process for business owners, unlike many other jurisdictions that have left physical presence requirements to interpretation, the UAE has issued a very precise and guided resolution on local economic substance requirements - The Cabinet of Ministers Resolution No.31 of 2019.  This resolution clearly outlines which business activities fall within the scope of the Law, which entities are exempt, what is needed to comply and the possible implications of incompliance.   For the convenience of our clients, we have herein, prepared a brief summary of the key points and requirements outlined in this Resolution. 

The Resolution clearly states that in order to meet the Economic Substance Test a company whose Core Income Generating Activities (GIGA) fall under the set requirements will need to demonstrate that it has sufficient physical presence and viable reason to be considered a UAE legal entity.   Although businesses can vary significantly in size and structure and each is entitled to a its particular operational model, there are some certain criteria on which adequate substance in the UAE is evaluated.  These criteria are outlined below:

• The legal entity is managed and controlled from the territory of the UAE and therefore its duly qualified Board of Directors is physically present in the UAE for Board meetings which are recorded and signed in the United Arab Emirates.  Furthermore, it is important to note that key managerial personnel also need to have a physical presence in the country and that most, if not all, strategic decisions are made in the United Arab Emirates. 
• The Core Income Generating Activities are handled and operated from the UAE.  This means that the company needs to have relevant employees that operate the day-to-day operations of the company locally and that all invoices, payments and contacts that generate the main source of income are executed from the territory of the United Arab Emirates. 
• The entity has a solid physical presence in the UAE.  This usually means that the company leases or owns office premises in the country that are equipped with all the necessary infrastructure for its business operations.  The company is also required to show evidence of adequate expenditure in the county such as payment of utilities, purchase of office supplies, service hire, organization of company events and other expenses associated with the proper operation of a company office.

 The relevant activities that fall under the scope of the substance requirements are as follows:

• Banking Business
• Insurance Business
• Investment and Fund Management Business
• Lease and Finance Business
• Headquarters Business
• Shipping Business
• Distribution and Service Centre Business
• Holding Business*
• Intellectual Property Business (IP)**

All entities registered and licensed in the United Arab Emirates that engage in the above-mentioned relevant activities, regardless of their form or type, are required to comply with the standard local substance requirements as outlined above and submit an Economic Substance Return to the relevant regulatory body annually within 12 months from the end of the financial period.  Please note, that failure to comply may lead to hefty fines, license suspension, automatic exchange of information with the relevant competent authorities of the beneficial owner’s country of tax residence and other legal and financial liabilities.  

The only entities that are fully exempt from substance reporting are entities that are at least 51% directly or indirectly owned by a local governmental body or authority.  However, it is also important to note that entities that have not earned an income from the relevant activities in a particular financial period are not required to meet the substance requirements or submit an Economic Substance Return for that particular period. 

*  Due to the nature of the business, Holding companies are subject to reduced substance requirements.  Though they are still required to comply with the all the mandatory reporting prerequisites of the jurisdiction and must maintain local physical offices and employees, they are do not have to be managed and controlled from the UAE or demonstrate proof of local expenditure.  

** Under certain criteria and conditions, companies dealing with Intellectual Property (IP) can fall under the category of a “High Risk” entity which significantly increases the substance requirements and exposes its owners to automatic exchange of information with foreign tax authorities.  In order to meet the local Economic Substance Test, such entities will need to demonstrate that they have a high degree of control over developing the IP asset; that they have a business plan which justifies why the IP is held in the UAE; that its full-time employees permanently reside and work in the UAE and have the necessary background, experience and qualifications to perform their business activities; and that the major managerial decisions are made within the UAE. 

Although the above article strives to cover the most important aspects of the physical presence requirements in the UAE, it is in fact a very complicated and variable matter which can differ from business to business.  No matter the complexity of your business model or the size of your business and budget, our professional team can help you find the ultimate solution for your corporation.  Our firm specializes in company registration and administration with a particular focus on efficient compliance and substance solutions.  Contact us today and our expert consultants will help you build a reliable and secure foundation for your enterprise whether it be in Dubai, RAKICC, RAKEZ, another emirate or an alternative country that best suits your business needs.