Out-Law / Your Daily Need-To-Know

UAE businesses 'must act now' on economic substance rules

Out-Law News | 30 Oct 2019 | 1:24 pm | 1 min. read

Businesses in the United Arab Emirates (UAE) may have just weeks to work out whether new economic substance rules apply. Failure to act now could result in penalties later, an expert has warned.

Economic substance rules were introduced in the United Arab Emirates (UAE) in April 2019 and guidelines have just been published setting out the detail of how they will be implemented.

Economic substance rules are common in countries with no or nominal corporate tax rates to comply with international initiatives to combat harmful tax practices. Introducing them has ensured that the UAE has been removed from an international blacklist of non-cooperative countries for tax purposes.

Though the rules were passed in April, the publication of guidance and the appointment of the regulatory authorities in October indicates that UAE authorities are serious about enforcing the rules according to Christopher Neal, a corporate law expert at Pinsent Masons, the law firm behind Out-Law.

"The UAE has come off the EU blacklist on the back of the laws and guidance being issued so authorities have a vested interest in enforcing the laws or risk being put back on the blacklist," said Neal. "The fact that regulatory authorities have been appointed and guidance issued indicates that these laws will be enforced. The guidance says that regulatory authorities will enforce strictly yet pragmatically. The word 'strict' suggests that there will be no escaping penalties. Enforcement of recent tax legislation is being enforced strictly and significant penalties have been imposed."

Though the first substantial reporting requirements under the rules are not due until the end of 2020 or 2021, businesses will have to act quickly to avoid later penalties.

"Businesses must tell the regulatory authorities from January 2020 whether they are carrying out a relevant activity or not, so need to ascertain now whether or not they are caught within the scope of the rules," said Neal. "They also need to implement compliance strategies now in order to avoid penalties being imposed after report submission."

The new rules require businesses to demonstrate that they carry out substantial economic activities in the UAE to comply with international initiatives to combat harmful tax practices.