Business owners/Entrepreneurs
Learning the intricacies of how UAE economic substance rules apply if you are a new business owner Image Credit: Stock image

Are you planning on newly incorporating your business in the UAE? If you are, you would have understood by now that one of the first things you need to do is apply for a trade licence.

This is whether you apply from the free zone you want to set up in, or from the mainland’s Department of Economic Development, that is assuming you do wish to conduct business with UAE-based companies. 

When you go about incorporating your business in the UAE, it is very crucial to know what part of the country's Economic Substance Regulations apply to you!

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However, when you go about the next steps of setting up your business in the UAE, it is very important to know what part of the country's Economic Substance Regulations apply to you and your business, so as to avoid having to face problems or even harsh penalties later.

To know in detail what the economic substance regulations entail, also read the below story. 

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New regulations, which were implemented in the UAE for fiscal years commencing January 1, 2019 and onwards, were announced by the government last year and encompasses several industries in the country.

How does then the new economic substance regulations apply to you?
Under the new economic substance rules, whatever the type of business you run and area it is based in, your company’s senior management team must be based in the UAE. This means they need to operate from the country on a full-time basis – for the activity that the business is licensed to trade in.

Regardless of the magnitude of your business - if you have a board, this means that meetings need to take place in the UAE. You will also need to be able to demonstrate these have been held on a regular basis – complete with ‘minutes’ to evidence this requirement.
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UAE Image Credit: File photo

• Employ full-time staff in the UAE

Apart from you being based out of the UAE – which is a given if you’re a sole trader incorporating in the UAE – if your business falls into the government-specified category you’ll need to consider how you’re going to staff your new business.

Another factor that is made clear is that employees need to be physically present – regardless of the type of contract they have with your business.

What about outsourcing?
Outsourcing some of your work is allowed, but you must be able to clearly prove the reasons behind this and provide a basis of whether the outsourced third party has adequate resources for carrying out the relevant activity.

• Ensure your main income is generated within the UAE

One of the peak prospects of starting a business within the UAE is its exposure internationally and its proximity to Europe, Asia, and the wider Middle East and North Africa (Mena) region.

If you run a free zone business not all your clients can be based locally, that is widely understood. But if not operating a free zone operation, according to the economic substance rules, while not all your clients need to be based out of the country, the actual work should be conducted from within the UAE.

One of the peak prospects of starting a business within the UAE is its exposure internationally

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What that means is, your client can be based overseas but your main place of work – and the location where it is carried out – should be the UAE.

Here is an example to make it simpler!
In the case of shipping companies it means activities such as hiring, paying and overseeing crew members and overhauling ships should be conducted by a ‘licensee in the state’ – in other words, someone holding the correct government-issued trade license.
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Image Credit: Pixabay

• Own assets and spend on local business services

The UAE’s income and corporate tax-free environment brings in varied business types and also an array of services, which is why entrepreneurs setting up shop here have several possible providers and third party suppliers to work with.

Placing this into consideration, the economic substance rules make it a requirement that relevant entities incur an adequate amount of operating expenditure in the UAE.