The UAE has recently made significant revisions to its economic substance regime, as outlined in Cabinet Decision No. 98 of 2024. This decision amends specific provisions of Cabinet Decision No. 57 of 2020, marking a crucial step in the UAE’s ongoing commitment to enhance tax compliance and align with international standards.
Key Changes
1. Cancellation of Economic Substance Requirements: Effective for financial years ending after December 31, 2022, the economic substance regime will no longer apply. This simplifies the compliance landscape for businesses operating in the UAE.
2. Abolition of Penalties: Alongside the cancellation of the regime, the new cabinet decision abolishes penalties associated with economic substance compliance for financial years ending post-December 31, 2022.
3. Refund of Paid Penalties: Licensees who have already paid economic substance penalties for financial periods starting after December 31, 2022, will be eligible for refunds. The Federal Tax Authority (FTA) is mandated to process these refunds.
These changes are expected to significantly streamline the compliance process for UAE businesses. However, it’s important for companies to note that those seeking to benefit from the 0% corporate tax rate applicable to Qualifying Free Zone Persons must still demonstrate adequate substance within the relevant Free Zone. For businesses involved in distribution activities, maintaining substance in the designated zones is also critical.
Compliance Obligations
While the new measures alleviate certain burdens, licensees are still required to fulfill compliance obligations related to the period from January 1, 2019, to December 31, 2022. This includes responding to information or amendment requests from regulatory authorities or the FTA, as well as settling any penalties incurred during that time.
While the Economic Substance Regulations henceforth will not apply to fiscal years ending after 31 December 2022, it is pertinent to note that as per Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CT Law), the Free Zone Person must maintain adequate substance in Free Zone/ Designated Zone (depending on the Qualifying Activities) to avail the Qualifying Free Zone tax regime.
Additionally, where a licensee or exempted licensee did not comply with the Economic Substance Regulations for the fiscal year ending on or before 31 December 2022, it may still be subject to an administrative penalty/assessment by the Federal Tax Authority. Please note that a six (6) year limitation period applies to administrative penalties under Economic Substance Regulations.
Conclusion
The recent amendments to the UAE’s economic substance regime represent a notable shift towards a more business-friendly environment. As finance directors, it is crucial to stay informed about these developments and ensure compliance with any ongoing obligations. By understanding these changes, companies can better navigate the evolving regulatory landscape and focus on their growth strategies in the UAE.
In summary, the licensee or exempted licensee should assess the following:
Ensure compliance with Economic Substance Regulations for the relevant open period.
Determine eligibility for any penalty waivers or refunds following this amendment. Please note that further information on the procedure to initiate the refund of penalties is expected to be issued in due course.
For the Free Zone entity, ensure adequate substance as per the CT Law.
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