Here’s why you must maintain visible economic presence through business activities in the UAE

Through incentives, infrastructure, and investor-friendly tax regimes, as well as easy incorporation procedures, the UAE has become one of the best places to establish a business anywhere on the planet. A few years back, the UAE did not have any taxation on most business activities, and free zones allowed foreign investors to completely own a company, turning the country into a tax haven of sorts for global firms. But as the UAE has set its sights on becoming an international trading hub, the administration has introduced levies along with checks and balances to comply with the norms of the Organisation of Economic Cooperation and Development (OECD). This includes a 5% VAT on products and services, as well as a 9% tax on corporate profits, which are the lowest globally, and negligible considering how profits can be freely transferred and the UAE offers a vast consumer base.

As part of the push to establish its credibility in the global business ecosystem and instill confidence among genuine investors, it’s also important for the UAE to address concerns about compliance. This is why the FTA has increased its inspections to detect violations of VAT norms, and the government has announced protection and rewards for whistleblowers who flag suspicious economic activity. In this scenario, it becomes essential for businesses to conduct regular audits to figure out their tax compliance and keep account books in order to be prepared for an audit by the tax authorities. Registering with VAT and filing regular returns within the given time frame is also crucial for retail and other businesses offering services to conduct their business activities glitch-free.

With time it had also become common for many entities to establish shell companies in the UAE only for intellectual property and gather profits, to avoid taxes in their home country, without much activity. To make sure that only firms genuinely interested in conducting business operate in the country, and comply with OECD’s norms, the UAE introduced an Economic Substance Regulation. This rule requires companies to maintain a considerable presence in the UAE by carrying out business activities and demonstrate it by filing timely reports. The relevant business activities which fall under the economic substance regulations are banking, insurance, investment fund management, lease-finance business, headquarters business, shipping, intellectual property business, and distribution, as well as service centre businesses.

The Economic Substance Regulation report must include:

Detailed clarification about the nature of the economic activity being conducted by a company.

Papers which help authorities calculate the income generated from these activities.

Minutes agenda and resolution of a board meeting and evidence that confirms the presence of non-resident directors for meetings.

CVs as well as biometric logs of full-time employees engaged in the reported economic activities.

The firms first need to notify regulators whether they are conducting the relevant business activities or not and then file a report listing their activities within 12 months after the financial year ends. Businesses who fail to comply with the Economic Substance Rules, will face penalties, and their information will be exchanged with the relevant foreign authority watching over tax compliance. It can also lead to regulatory action such as suspension, revocation of licenses or denial of extension on a trade permit. The penalties for not demonstrating an economic presence in the UAE through relevant activities, can be anything between AED20,000 to AED400,0000.

Through these ESR reports, the FTA can also ask for additional details to filter out shell companies that have been established in the UAE only to save taxes and aren’t conducting any activity. With corporate taxation and rules on transfer pricing coming in to make compliance with OECD norms even more watertight, the FTA may make further changes to Economic Substance Regulations.