What do the new UAE Economic Substance Regulations mean for Holding Companies?

Relevant Legislation and Effective Date

The United Arab Emirates (the UAE) issued the Cabinet of Ministers Resolution No. 31 of 2019 concerning economic substance regulations (the Resolution), effective from 30 April 2019 (the Effective Date).

On 12 September 2019, the UAE published a guidance document (the Guidance) regarding the Resolution. The Guidance clarifies certain aspects of the Resolution.

What does the Resolution mean for Holding Companies?

• The Resolution applies to all onshore and free zone companies, branches and representative offices that carry on the activity of ‘Holding Company’.

• A holding company that derives income solely from capital gains and receipt of dividends will not be required to meet the economic substance requirements through the general economic substance test applicable to other entities but instead must fulfill the economic substance requirements through: (i) satisfaction of all reporting requirements under the law applicable to the holding company; and (ii) having adequate premises and employees to carry out its activities.

• The Guidance does not establish a standard for what is considered to be “adequate” substance. This could therefore imply that a registered office and director/employee is sufficient in order to meet the requirements.

• The Guidance does however clarify that a holding company that owns investments other than equity interests (e.g. real estate, bonds) does not benefit from the reduced economic substance requirements and the regular economic substance requirements would apply.

• Reporting to the relevant authority begins on 1st January 2020. Outsourcing certain economic substance requirements to third party providers is permitted.

• Existing holding company structures in free zones, including the DIFC/ADGM, should be reviewed in light of the new requirements, and appropriate reporting mechanisms should be put in place.