United Arab Emirates: Ground Breaking UAE Business Reforms Announced: Foreign Ownership, Economic Substance & Tax Reports

Last Updated: 11 July 2019
Article by Adrian Low, Benjamin Smith, Rebecca Hilton and Justine Reeves

The UAE government has passed legislation which will change the shape of the business operating environment in the UAE for years to come. Through press releases and the issuance of some detailed legislation in the last week, reforms on foreign ownership and global tax co-operation have been revealed. In this bulletin, we outline the key relaxations being introduced and the new requirements imposed on UAE businesses. This is essential reading for all UAE businesses, and foreign companies looking to inwardly invest into the country.

One of the core goals of the UAE government in the last few years has been to strengthen the country's attractiveness to foreign business, as a key market in the Middle East. In light of this, the government has been focused on reforms to:

  • relax the foreign ownership restrictions on companies and other entities established in the UAE;
  • introduce a tax regime, and to form part of the global framework for tax compliance.

In a landmark week, the UAE government has passed new legislation focused on these reforms.

Foreign Ownership – Cabinet Resolution Passed

The Foreign Direct Investment Law* introduced a framework for the UAE Cabinet to increase the proportion of permitted foreign ownership of UAE companies. The FDI Law made clear that any relaxations would be sector based, and relate to specific activities. However, the details of the core "positive list" were to be published through legislation in due course. Click here to see our briefing from November 2018 for more information on this law. 

On 2 July, through an official press release and social media channels, the UAE government announced that the Cabinet had passed a Resolution providing the contents of that positive list.

Affected sectors and activities

According to the official press release, economic activities in 13 sectors have been specified as eligible for up to 100% foreign ownership. 

Sectors mentioned in the press release

  1. Renewable energy
  2. Space
  3. Agriculture
  4. Manufacturing industry
  5. Transport and storage
  6. Hospitality and food services
  7. Information and communications
  8. Professional, scientific and technical services
  9. Administrative and support services
  10. Education activities
  11. Healthcare
  12. Art and entertainment
  13. Construction

Not all economic activities within these sectors will be liberalised. The activities highlighted in the official press release are innovative in nature – such as production of new types of energy, including greener options, biotechnology, e-commerce and transportation of pharmaceuticals. 122 specific activities across these sectors will be listed in the Resolution, once published.

The press release states that the proportion of permitted foreign ownership will be determined by the Emirate governments. Therefore, there may be different levels of permitted foreign participation for the same activity in the seven Emirates (potentially creating greater internal competition for inward investment amongst them). Wholly foreign-owned entities may not be allowed for all of the liberalised economic activities, but the proportion of capital in foreign hands will be increased above 49% to allow majority control. 

We will issue further analysis of the effect of this Resolution once published, and when local Department of Economic Development policy becomes clearer.

Tax Related Legislation - Part of the New UAE Operating Environment

International tax co-ordination is a focus of governments worldwide. In new legislation issued on 30 April 2019 but only recently published, the UAE government has imposed new reporting requirements which will affect most multinational businesses operating in this country.

The UAE government has issued:

  • Federal Cabinet Resolution No. 31 of 2019 specifying the requirements of actual economic activities.
  • Federal Cabinet Resolution No. 32 of 2019 on the organisation of reports submitted by multinational companies.


The UAE is not a tax free jurisdiction. In 2018, the UAE introduced VAT to the country, as well as an excise tax applicable to certain goods. Corporation tax is levied on foreign banks and oil companies operating in the country, and the UAE Ministry of Economy has been clear for some time that it is studying the effect of the introduction of a more general federal corporate income tax.

However, there is no widely applicable tax on business profits yet, and, in contrast to other jurisdictions, the UAE remains a low tax environment for most businesses.

Fiscal transparency and regulation is a global priority.  International financial organisations such as the Organisation for Economic Co-operation and Development (OECD) champion better global co-ordination on tax regulation, including measures to tackle tax evasion, so that businesses cannot take advantage of differences in tax legislation around the world.

Specifically, governments are co-ordinating to produce a consistent network of legislation to facilitate:

  • Transparency – enabling exchange of fiscal information on request, and accession to OECD's treaties on this topic;
  • Fair tax competition – in particular, for zero and low tax jurisdictions, this includes taking measures to tackle the use of the local tax regime to create artificial structures with no substantive economic activities, and combatting other harmful tax practices.

In particular, the European Union has chosen to actively police these principles by applying sanctions against countries which do not meet specific objectives based on these principles.

Economic Substance Regulation – Resolution No. 31

Cabinet Resolution No.31 contains similar concepts and provisions to legislation on economic substance passed recently by Bermuda, BVI, the Cayman Islands and other no/low tax jurisdictions.

The following are the key take-aways for UAE businesses in the implementation of this Resolution:

  • Companies with specific categories of licence activity will be required to produce evidence that they undertake a substantive economic activity in the UAE.
  • The Resolution introduces a concept of main income generating activities, which are specific to each licence category and for which the Resolution provides a non-exhaustive list. For example, for companies with an insurance licence category, the Resolution states that the main income generating activities should include:
    • Predicting and studying risk
    • Risk insurance or reinsurance of risk
    • Provision of insurance to customers
    • Guarantee of insurance and reinsurance

Licence activities subject to Cabinet Resolution No. 31

  1. Banking
  2. Insurance
  3. Investment fund management
  4. Finance leasing
  5. Headquarters
  6. Shipping
  7. Holding company
  8. Intellectual company operations
  9. Distribution and service centres
  • Both onshore UAE and free zone licences are within the scope of the Resolution, including the financial free zones of the DIFC and ADGM.
  • In order to demonstrate the existence of an substantive economic activity, businesses will need to show that:
    • Main income - the business generates a main income from its activities in the UAE
    • Management - the instructions related to the business are issued, and the business is managed, from within the UAE.  Specifically, the business must show that:
      • the board (if any) of the licence holder meets in the UAE regularly, consistent with the number of board resolutions passed
      • a quorum of board members is present in the UAE
      • minutes are taken and signed by board members in attendance, and include strategic decisions taken in those meetings, and are kept in the UAE
      • board members must have the knowledge and expertise to perform their duties
      • branch managers of foreign companies are present in the UAE when taking key management and operational decisions
    • Employees - the business has an appropriate number of full time, qualified employees working in that business, present within the UAE (or the existence of an agreement with a third party for the provision of services in this respect)
    • Adequate expenses - the business incurs adequate operational expenditure
    • Adequate assets - the business has adequate tangible assets
    • Third party controls - where the business is performed in the UAE under a licence to a third party, that the company has control and supervision rights over that third party
    • Specific provisions for holding companies – there are specific provisions related to holding companies whose income and profits are derived only from their equity investments
  • Every business with a UAE onshore, free zone or financial free zone licence will be required to submit an annual notice to state whether it undertakes relevant activities, and if it does, it must also include details of any other taxation system to which the income from that activity is wholly or partially subject.  It must also provide the date of the end of its fiscal year.
  • Businesses which conduct a relevant activity in the UAE will be required to submit an annual report within 12 months of the end of its fiscal year.The report must satisfy a long list of requirements including data related to the points listed above. The first reports will be due in 2020.
  • If the business's records needed to demonstrate its compliance with the Resolution (and the contents of the annual report) are not in English, the regulatory authority may require them to be translated into English. There is no Arabic translation requirement.
  • There are powers for the regulatory authority to pass information to the Ministry of Finance (MOF), and for the MOF to communicate and liaise with foreign authorities, in the event of non-compliance.
  • There are fines for non-compliance for businesses with the economic substance rules – between AED10,000 and AED50,000 for a first time breach, rising to between AED50,000 and AED300,000 for breach in the subsequent fiscal year. There are also fines for the failure to provide information
  • The regulatory authority has a 6 year period to assess whether a business has complied with the Economic Substance Regulation.
  • Further regulations are expected to follow with additional details of the reporting requirements.
All business in the UAE will need to submit an annual notice to confirm whether they undertake activities the subject of the Economic Substance Regulation

Tax reporting requirements for multinationals – Resolution No. 32

Cabinet Resolution No. 32 is designed to fit into a global web of tax transparency legislation, so that there are few jurisdictions in which the amount of profit and revenue is not reportable.

What is a "multinational"?

The Resolution is focused on multinational groups of companies, which are groups:

  • in which either at least two of the companies in the group are tax resident in different jurisdictions, or there is one entity which has permanent establishments (usually branch entities) in at least one other jurisdiction; and
  • which generate total consolidated revenues of at least AED3.15 billion (approximately US$857 million) per annum as shown in its group consolidated accounts,

Multinational Group

The concept of a group is, essentially, defined by reference to ownership or control, and is referenced against a requirement to produce consolidated accounts for companies within it, by the laws of its country of tax residence (or would have to produce such accounts if it were a listed company).

In other words, this Resolution is focused on large international businesses, seeking to take advantage of non-transparent tax regimes to reduce tax liabilities. 

Subsidiaries, affiliates and branches within Multinational Groups will need to notify the MOF of the group entity with filing responsibility

Which entities are subject to the Resolution?

Resolution No. 32 places an obligation on an entity established in the UAE to issue a detailed report of financial and other information if:

  • It is the parent company of a Multinational Group;
  • It is an affiliate (separate business unit) of a Multinational Group, and:
    • the relevant parent company is not required to file a tax report in its jurisdiction of tax residency; or
    • where such jurisdiction is either not required, or in practice repeatedly fails, to share tax information with UAE authorities; or
  • It has elected to file the tax report, in place of its parent.

Note that the filing requirement is referenced to a concept of UAE tax residency.  However, there is as yet no generally applicable supporting tax legislation in the UAE which provides guidance on the conditions for UAE tax residency.  The reference to this concept may signal that this is to come in future legislation.

In essence, a UAE based company or branch which is part of a Multinational Group will only be subject to a detailed filing requirement in the UAE if another group member is not required to file that information under the tax laws of another country which shares tax information with the UAE.

When do the reporting obligations start?

Affiliates of Multinational Groups will need to notify the MOF of the name and country of tax residency of the parent or other entity responsible for the filing of the information, on or before the last day of the group's financial year.

Reports must be submitted within 12 months of the end of a Multinational Group's financial year, starting from 1 January 2019 so while full reports will not be due until 2020 there will still be some preparatory steps that need to be completed before then.

Contents of the tax report

  • Revenue
  • Profits and losses before tax
  • Income tax paid
  • Declared capital
  • Accrued profits
  • Number of employees
  • Non-cash or cash equivalent assets

in each country in which the Multinational Group operates

Making a detailed filing

For UAE entities which are required (or elect) to file a detailed tax report, the Resolution provides for confidentiality, and includes a statement that the MOF will not rely on the contents upon the introduction of transfer pricing legislation.  This is a clear indication that these restrictions are to follow.

Transfer pricing is part of the overall global taxation web: through intra-group transactions priced outside of an open market value, a group can move profits around an international group to minimise tax (or for non-tax related reasons).  Usually, transfer pricing legislation requires groups to price intra-group transactions at a market value.  The types of intra-group transactions which may be caught include supplies of goods and services, financing and IP and other types of licensing arrangements.  Implementation in the UAE of transfer pricing provisions may have a significant effect on ownership structures of UAE companies. 

The Resolution also provides for significant access powers for the MOF, and for fines (capped at AED1 million in any financial year) for non-compliance.

* Decree Law No. 19 of 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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