Economic Substance – UAE acts for Transparency in Tax, Financial Reporting
The UAE Cabinet recently introduced economic substance regulations effective April 30, 2019, which bring additional annual compliance requirements for UAE entities carrying out ‘relevant activities’ in the country.
This follows international movement by the OECD and EU on the need for demonstrating substance by entities in low or no tax jurisdictions, and the UAE regulations are broadly similar to the regulations issued by nine other countries.
Need for these regulations
The OECD’s BEPS project, endorsed by the G20 countries, was commissioned with a view to bringing more substance, coherence and transparency to the international taxation system and addressed the requirement of substantial activity in its report on BEPS Action 5.
The European Union has also been actively supporting the introduction of substance requirements in jurisdictions with low/nominal taxation regimes and has released a list of non-cooperative jurisdictions that do not comply with the same (the UAE features on the list along with 11 other countries).
As a result of these developments, nine countries – the British Virgin Islands, Mauritius, Jersey, Guernsey, the Isle of Man, Seychelles, Bahamas, Bermuda and the Cayman Islands – have already introduced economic substance requirements earlier this year. The UAE substance regulations appear to be in direct response to the above developments and aim to address findings issued by the EU, and possible exclusion from the list of non-cooperative jurisdictions for tax purposes.
UAE businesses covered
The regulations apply to a licensee that carries out a ‘relevant activity’, established in the UAE mainland or the various free zones as a representative office, branch or a commercial enterprise. The regulations would not apply to government-owned enterprises (directly or indirectly).
Businesses covered under the regulations include banking, insurance, investment fund management, shipping, distribution and services, intellectual property, lease finance, headquarters and holding firms. The regulations have defined what activities constitute relevant activities under these businesses.
All entities in the UAE need to notify the regulatory authority (the authority that has issued the business licence to the entity) of its financial year-end and whether or not it is carrying on a relevant activity. A UAE entity undertaking a relevant activity would need to submit a report to the regulatory authority within 12 months after its financial year end.
The report would include details regarding the relevant activity conducted by the entity including information regarding the income from such activity, operating expenses and assets employed, location of premises, details of employees and a declaration as to whether or not the licensee satisfies the economic substance test. Additional information is required to be submitted for high-risk intellectual property businesses.
Consequences of failure to comply
Where an entity fails to meet the economic substance test, an amount of administrative penalty between Dh10,000 and Dh50,000 shall be imposed (between Dh50,000 and Dh300,000 if the test is failed the subsequent year as well). Further, a separate penalty between Dh10,000 and Dh50,000 could be levied for failure to provide any information or providing inaccurate information.
The regulatory authority may also impose suspension, revocation or non-renewal of the licence of a licensee in case of repeated non-compliance. Entities that do not meet the economic substance requirements will also be reported to the Ministry of Finance for onward exchange of information with tax authorities of ultimate parent entity or beneficial owner.
Subjectivity around these requirements
Though the regulations are effective April 30, 2019, additional guidance and regulations are expected in due course. This should clarify concerns regarding practical applicability of the regulations and meaning of terms like “adequate” used extensively in the regulations as adequacy would need to be determined on a case-to-case basis, and it is unlikely to be based on any standard criteria.
Also, as free zone entities are also covered within the scope of these regulations, it will be interesting to note how these requirements will be practically looked upon at, for instance, meeting requirements of “having adequate people or premises” for licenced offshore companies, meeting test for dormant entities not “carrying out” any activities during the year, etc.
While the regulations should not impact UAE headquartered businesses and others with genuine operations in the UAE, there will be reporting and compliance requirements to manage. All UAE entities should analyse the group structure to identify entities in the UAE and other jurisdictions (like the British Virgin Islands and Cayman Islands), which require compliance with their local economic substance regulations. Once it is determined that a UAE/other overseas entity undertakes any relevant activities, businesses would need to assess whether economic substance requirements would be met. Depending on findings of such exercise, remedial options would need to be considered, if necessary.
While the regulations are a welcome move by the UAE that will strengthen the fiscal, corporate governance and reputation of the country, one would need to wait and see how the same is practically applied by authorities.
Nilesh Ashar and Vartika Jain are partner and manager, respectively, at WTS Dhruva Consultants in Dubai. Views expressed are their own and do not reflect newspaper’s policy.
Rich keeping large chunk of their wealth in UAE
Ultra-high net worth and high net worth individuals continue to retain large portions of their wealth in the UAE, a senior private banker at HSBC said.
“We have seen that our clients prefer to keep significant portion of their wealth in the UAE while they continue to diversify selectively into other opportunities globally.” said Farzad Billimoria, head of the HSBC Private Banking (Suisse), Dubai International Financial Centre Branch.
He pointed out that there are quite a few trends emerging in terms of private banking in the UAE.
Some of these emerging trends relate to clients wanting to be closer to their bankers, prefer to deal with banks that have a full-service offering and there is a huge growing demand for credit and related services in the country.
“Credit in terms of liquidity against existing portfolio and real estate is the changing trend we have seen. Also, we have seen more demand for lifestyle-related private banking services and private wealth solutions including trust and insurance services,” Billimoria said in a recent interview with Khaleej Times.
A Boston Consulting Group report last year had predicted that personal wealth in the UAE is projected to continue to grow at 8 per cent compound annual growth rate to Dh2.16 trillion ($590 billion) in investable assets by 2022.
A report by New World Wealth had predicted that growth in UAE wealth will be strong over the next 10 years, growing at 51 per cent to reach Dh5.14 trillion by 2027. The number of high net worth individuals in UAE is expected to reach just over 140,000 by 2027, whilst the number of billionaires is expected to reach around 30 by 2027.
Billimoria disclosed that the bank, which has recently shifted its private banking office to a new DIFC office space as it expands its presence in the UAE, has been consistently growing and has doubled its revenues and assets under management, as well as its employee base since 2015.
“From here onward, our ambition is to grow 20 per cent year-on-year until 2022 in terms of workforce in the UAE. HSBC will be hiring strategically and adding to its presence in the new DIFC office – relationship managers, investment advisors and wealth planners. By 2022, the target is to double assets under management, revenues and the number of clients in the UAE,” he added.
Billimoria attributes the growth of its private banking business in the UAE to HSBC’s full universal banking model.
“We serve client needs – no matter how complex – in collaboration with all other lines of businesses… when you offer a client a full banking solution along with other lines of businesses, you become a bank of choice which can offer a whole range of services to the client,” he added,
He noted that the growth of wealth in the UAE has been positive due to several factors.
“One is the geographical advantage of where the UAE is placed. Secondly, the advanced financial infrastructure in the country and also the strength of the regulatory framework. Hence, the UAE remains the destination of choice for ultra-high net worth and high net worth individuals.
Considering the above, Billimoria expects private wealth will continue to grow in the UAE.
UAE tipped to be best Gulf economy in 2020
The slowdown in the UAE’s economy due to a cut in oil production as part of the Opec+ deal will be short-lived and the economy will be the fastest-growing economy of the Gulf region next year, according to a new study.
“Economic growth in the UAE will slow over the rest of this year due to the impact of oil production cuts. But preparations for the World Expo will help to drive rebound in 2020 and we expect the economy to be the best-performing in the Gulf,” said Jason Tuvey, senior emerging markets economist at Capital Economics.
Opec and its allies led by Russia agreed to extend oil output cuts until March 2020 on Tuesday, seeking to stabilise the price of crude as the global economy weakens and US production soars.
The UAE’s economic growth reached a two-year high of 2.8 per cent in the fourth quarter of 2018. However, this largely reflected stronger growth in the oil sector as the country joined Saudi Arabia in raising oil production ahead of the re-imposition of US sanctions on Iran. In contrast, growth in the non-oil sector weakened to just 0.2 per cent year-on-year, its worst performance since 2009.
“We think that GDP growth probably eased in the first half of this year as oil production cuts weighed on growth in the oil sector. The decision earlier last week by Opec+ to roll over its existing oil output agreement to the end of March 2020 means that this drag is likely to intensify. In Q4, weaker growth in the oil sector will shave around 2.5 percentage points off year-on-year GDP growth compared with Q3,” said Tuvey.
Capital Economics predicts crude will stay low at $60 per barrel this year.
“Heading into 2020, however, economic growth is likely to rebound. The drag from the oil sector will fade. And the non-oil sector will be bolstered by the 2020 World Expo. Preparations for the exhibition will be stepped up and there will be a sizeable boost to activity once the Expo kicks off late next year. Annual tourist arrivals are expected to reach as much as 20 million next year, compared to just under 16 million in 2018. All else equal, this could boost overall GDP growth by as much as 2.5 percentage points,” he said.
Earlier, the Central Bank of the UAE also revised down its growth forecast for 2019 in its first-quarter report and forecast slower growth for the third and fourth quarters at 2 per cent and 1.6 per cent, respectively. It predicted faster growth of 2.2 per cent for the first and second quarters of 2019.
FocusEconomics said in its latest update that the UAE’s growth moderated but remained healthy in the first quarter, as Opec+ production cuts in effect since January dampened oil-sector growth, while non-oil activity picked up after a near-flat reading in the fourth quarter, thanks in good part to higher government spending.
“Turning to the second quarter, the non-oil sector appears to have made some positive strides… data for Dubai also indicates healthy tourism, as well as a pick-up in construction activity in May due in large part to the ramp-up of Expo 2020 projects,” it said.
UAE visa guide: Long-term visa, residence visa, tourist visa and more
Whether you want to work or simply visit the UAE, several visas are available that can suit your travel plans. While the country issues many other kinds of visas, we’re just going to talk about the most common ones. Which UAE visa is right for you? Here are the options:
UAE permanent residency scheme:
The UAE has introduced a six-month multiple-entry interim visa for non-UAE residents seeking long-term investment visa in the country. The new system enables foreigners to live, work and study in the UAE without the need of a national sponsor and with 100 per cent ownership of their business on the UAE’s mainland.
These visas will be issued for 5 or 10 years and will be renewed automatically.
Those eligible for the long-term visa and currently residing in the UAE can transfer their existing residency permits to investor visa if they fulfil conditions.
Investors, experts and talented students who are eligible for the long term visa – ranging from five to ten years – under the Cabinet Decree No. (56) of 2018 can avail of the interim visa to “identify opportunities in their field and make appropriate decisions for them and families”.
The UAE authority said it has activated three new services on its portal:
* a six-month visa with multiple entry to complete the procedures for residency of an investor
* a six-month visa with multiple entry to complete long-term residency procedures for both entrepreneurs and outstanding students
* a six-month visa with a single entry to complete the residency procedures for the talented individuals.
The Gold Card will be granted to qualifying investors, entrepreneurs, professional talents, researchers in various fields of science and knowledge, and outstanding students.
It is a new initiative will attract greater foreign investment and stimulate the local economy, making it more efficient and attractive for investors. It will also increase the UAE’s competitiveness and reaffirms the country’s position as a global incubator.
Gold Card visa holders can be out of the country for longer than six consecutive months.
How to apply: UAE-based individuals can apply at any immigration office or accredited offices. Non-UAE-based individuals can acquire the documents from ica.gov.ae
Long-term residence visas in the UAE
10-year visa without a sponsor:
The following categories are entitled to apply for a 10-year residence visa in the UAE:
1. Investors in public investments of at least Dh10 million
The investment may take many forms such as:
* A deposit of at least Dh10 million in an investment fund inside the country?- Establishing a company in the UAE with a capital of not less than Dh10 million?- Partnering in an existing or a new company with a share value of not less than Dh10 million?
* Having a total investment of not less than Dh10 million in all areas mentioned, on condition that the investment in sectors other than real estate is not less than 60 per cent of the total investment.
Granting a visa is subject to the following conditions:
* The amount invested must not be loaned?- The investment should be retained for at least three years?
There should be a financial solvency of up to Dh10 million?
*Visa can be extended to include business partners, on the condition that each partner contributes Dh10 million
* The long-term visa can include the spouse and children, as well as one executive director and one advisor?
* Investors from abroad may apply for a multiple-entry permit for a six-month period.
2. Persons with specialised talents
This includes specialised talents and researchers in the fields of science and knowledge such as doctors, specialists, scientists, inventors, as well as creative individuals in the field of culture and art. The visa advantage extends to the spouse and children. All categories are required to have a valid employment contract in a specialised field of a priority in the UAE.
Granting a visa is subject to the following conditions:
– Scientists must be accredited by Emirates Scientists Council or holders of the Mohammed bin Rashid Medal for Scientific Excellence?-Creative individuals in culture and art must be accredited by Ministry of Culture and Knowledge Development?
– Inventors must obtain a patent of value, which adds to the UAE’s economy. Patents must be approved by Ministry of Economy?- Exceptional talents must be documented by patents or a scientific research published in a world-class journal ?
– Executives must be owners of a leading and internationally recognised company or holders of a high academic achievement and position.
3. Doctors and specialists:
* A PhD degree from one of the top 500 universities in the world (refer to ICA for information)?
* An award or certificates of appreciation in the field of the applicant’s work?- contribution to a major scientific research in the respective field of work?
* Published articles or scientific books in distinguished publications in the respective field of work?
* Membership in an organisation related to the field?- A PhD degree, in addition to 10-year professional experience in his field?
* Specialisation in areas of priority to the UAE.
5-year visa without a sponsor
Eligibility for a 5-year visa without a sponsor
The following categories are entitled to apply for a 5-year residence visa in the UAE.
Granting a visa is subject to the following conditions:
* The investor must invest in a property of a gross value of not less than Dh5 million.
* The amount invested in real estate must not be on loan basis.
* The property must be retained for at least three years.
* This category includes those having an existing project with a minimum capital of Dh500,000, or those who have the approval of an accredited business incubator in the country.
* The entrepreneur is allowed a multi-entry visa for six months, renewable for another six months.
* The long-term visa includes the spouse and children, a partner and three executives.
3. Outstanding Students
* Outstanding students with a minimum grade of 95 per cent in public and private secondary schools
* University students within and outside the country having a distinction GPA of at least 3.75 upon graduation.
The residence visa is the next step after securing an employment visa. Think of it as an evolution of the latter. To secure this, you’ll need to get a medical test and apply for another document – the Emirates ID. The UAE Resident Identity Card certifies that the holder is a valid UAE resident. After the whole process is complete, you can now sponsor your family members and bring them into the country as well.
An employment visa, also known as a work permit, is issued by the Ministry of Human Resources and Emiratisation. It’s valid for two months from the date of issuance and you’ll need one if you’re looking to work in the UAE. As of late February, residents who are changing jobs in the UAE will no longer need a good conduct certificate for the visa if they are in the country.
As it says on the tin, a tourist visa is used by travellers whose purpose in the country is for tourism. The visa permits the holder to stay in the country for 30 days. To get one, you’ll need sponsorship by a UAE airline, hotel and tour operators. Each UAE airline offers visa services when you fly with them. Apart from that, travel agents and hotels can also arrange a tourist visa for you.
You’ll need a friend or relative residing in the country to sponsor your UAE visit visa. They can apply for your visa at any GDRFA office across the emirate and the process takes a few days. After the visa is issued, your sponsor should send you a copy of your permit through fax or email. He should submit the original permit to the airport. When you arrive at the airport, you can collect it from there. It is necessary for you to receive a copy of your entry permit before you leave your country.
Have a connecting flight with a lengthy stopover? If you’re just passing by, UAE airlines also issue transit visas valid for those whose stopover exceeds 8 hours. Passengers with transit visas must leave the country within 96 hours of arrival. If you have a shorter transit time, worry not! Dubai Airports recently proposed that transit passengers may soon be able to experience the city as part of the Dubai 10X initiative.