Economic substance test for UAE company

[humus]

If I open a UAE FZCO with one director cum shareholder. and the director only visits UAE twice a year, to keep the residence visa active. Will the economic substance test fail? I mean it should, because the core income generating activities (CIGA) are being conducted by the director outside the UAE, simply because he is outside most of the year.

@Fred used to mention, that being in the uae twice a year, to maintain the residence visa should be sufficient. But that will certainly fail the economic substance test, if more time is not spent in the uae. Do you guys have any opinion about this?

 

[Ancova]

I would strongly advise to visit the ESR website and contact them directly. Even the‌ free zones are not allowed to give any information about this.

 

[Martin Everson]

It depends‌ if your business activity is subject to UAE's ESR rules. And if so then clearly‍ what you are doing does NOT meet any form of economic substance if Director/shareholder is⁠ only in UAE a couple of days of the year and all activity is done⁤ outside the UAE.

You can find more below anyway.

https://mof.gov.ae/economic-substance-regulations/

 

[Ancova]

100% true but as a former employee of a free zone, I⁤ urge you to contact the government directly and ask, you do not want do anything⁣ wrong here

 

[humus]

Does the sale of Software products (online) fall under Distribution & Service⁤ centre business?

 

[Martin Everson]

You will need to seek professional legal advice‍ there or at least speak to an accountant there and get something in writing. Even⁠ if they end up giving you wrong information just keep something in writing either way⁤ to protect yourself.

 

[bigbite100]

sorry for the stupid question - why should there be a substance test and who‌ should do it? what happens if this is failed?

 

[Ancova]

Relevant Activities:

• Banking Business
  
• Insurance Business
  
• Investment Fund management Business
  
• Lease – Finance Business
  
• Headquarters Business
  
• Shipping Business
  
• Holding Company Business
  
• Intellectual property Business (“IP”)
  
• Distribution and Service Center Business‌
  

 

[Martin Everson]

To avoid shell companies and unfair tax‍ advantages by companies using low tax jurisdictions to obtain a benefit with no tangle substance⁠ in that jurisdiction. You should it also.

--- quote start

The Regulations apply to financial years commencing on or⁣ from 1 January 2019. Entities that are within the scope of the Regulations are required⁢ to submit an annual Notification form to their Regulatory Authority , and complete and submit︀ to the same Regulatory Authority an Economic Substance Report within 12 months from the end︁ of their financial year (e.g. 31 December 2020 for entities with a financial year ending︂ 31 December 2019). An entity is not required to meet the Economic Substance Test and︃ file an Economic Substance Report for any financial period in which it has not earned︄ income from a Relevant Activity or if it meets the conditions for being exempt. A︅ Notification form will need to be submitted regardless. Failure to comply with the Regulations can︆ result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in︇ Article 1 of the Regulations), as well as other administrative sanctions such as the suspension,︈ revocation or non-renewal of the entity’s trade license or permit.

---- quote end

Also if︉ you fail meet ESR then the below happens.

https://www.offshorecorptalk.com/th...substance-with-ubos-country.36103/post-198486
P.S Just make sure your activity︊ as I mentioned is not subject to ESR rules 😉.

 

[Fred]

There is a misunderstanding / misinterpretation of the ESR⁤ here.

As mentioned earlier here already almost no one ever qualifies for the relevant activities⁣ for the ESR.