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UAE Adapts Economic Substance Rules To COVID-19

by Lorys Charalambous,, Cyprus

25 June 2020

On May 28, 2020, the United Arab Emirates Ministry of Finance released guidance for taxpayers on the territory's economic substance rules (ESR) and announced that they would be eased for taxpayers affected by COVID-19.

The UAE last year adopted new economic substance regulations in Cabinet Resolution No. 31 of 2019. These regulations provide that a company engaged in one of a number of specified sectors must have sufficient economic substance in the territory to access the territory's tax regime. The changes are in response to pressure from the EU on a number of territories, following recommendations from its EU Code of Conduct Group, and apply for financial years starting on or after January 1, 2019.

The key activities identified by the European Commission Code of Conduct Group are: banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles, and holding companies that generate income from any of these key activities.

The Ministry confirmed it will take into consideration the impact of COVID-19 on the usual operations of licensees when determining whether they have demonstrated sufficient economic substance in the territory.

The Ministry stated: "These considerations would only apply with respect to those substance requirements that are directly affected by COVID-19 measures (e.g. travel restrictions, self-isolation situations, or quarantine requirements). In particular, consideration will be given to the impact of restrictions on the ability of Licensees to demonstrate their ability to meet the requirements of the directed and managed test (Article 6.2(b), ESR)."

"Businesses should give consideration to the ability to appoint alternate directors in the UAE who can attend meetings in the UAE and thereby address any short-term practical difficulties arising from COVID-19 related measures."

The Ministry further announced that the notification filing requirement (under Article 8.1 of the ESR) will be extended to June 30, 2020. Other financial free zones have varying deadlines. The deadline for the filing of the economic substance return remains unchanged in respect of the 2019 financial year. The requirements provide that businesses must prepare and submit to the same Regulatory Authority an economic substance declaration within 12 months from the end of their financial year.

The Ministry said licensees should retain records to demonstrate what changes were necessary to their normal operating procedures in response to COVID-19.

TAGS: United Arab Emirates | Finance | tax | investment | business | European Commission | mining | intellectual property | banking | insurance | regulation | Europe | Other | BEPS

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