The UAE’s recent laws on ultimate beneficial owners and economic substance

The UAE is ramping up measures to tackle tax avoidance and money laundering to align itself with international best practice. Two important developments in this respect are Cabinet Decision No. 58 of 2020 concerning Ultimate Beneficial Owners (the UBO Law) and Cabinet Resolution No. 57 of 2020 concerning Economic Substance Requirements (the ESR Law) that were issued in recent months. This note will look into what these laws are and what they require from companies in the UAE.

1. Ultimate Beneficial Ownership and Shareholder/Partner Registers

What is it?

The UBO Law requires companies to maintain registers with information about ultimate beneficial owners (UBOs), shareholders and nominee board members (together, the Registers).

Who does it apply to?

The UBO Law applies to all companies licensed and registered in the UAE, except for those that are wholly owned by a local or federal government body, or are set up in the DIFC or ADGM financial free zones, which are already subject to their own UBO disclosure requirements.

What must be disclosed?

Companies must maintain one register of UBOs and another register of shareholders/partners. If a company has trustees or nominee managers it must include information about them in the shareholder/partners register as well.

UBO Register

The UBO Register should set out details of the company’s “Real Beneficiaries”, which the UBO Law defines as:

• Natural persons who own or control, either directly or indirectly, at least 25% of the company’s share capital, or who hold at least 25% of the voting rights, or who control the company through other means, including by holding a right to appoint or dismiss the majority of the directors or managers.
• If no natural person satisfies the above criteria, the Real Beneficiary is the natural person who exercises control over the company by other means.
• If no natural person satisfies both the conditions above, then a natural person who is responsible for the senior management of the company will be deemed the Real Beneficiary.
• The Register must include, for each Real Beneficiary, the following:
  • Full name, nationality, and date and place of birth.
    Place of residence or notice address.
  • Passport or identification number, country, and date of issue and expiry.
  • The basis on which the natural person is identified as a beneficiary.
  • The date on which the person became a Real Beneficiary, and if applicable, the date on which they ceased to be one. 

Shareholder/Partner Register

The Shareholder/Partner Registers must include the following for each partner or shareholder:

• The number and class of shares/equity held, and the voting rights attached to such shares.
• The date on which the shareholder/partner acquired the shares/equity.  
• Shareholders/partners that are natural persons: same information that is required for a Real Beneficiary.
• Shareholders/partners that are legal entities:
  • Name, legal form, and memorandum/articles association.
  • Address of main office or headquarters, and if the legal entity is foreign, the name and address of its legal representative in the UAE should be included.
  • Names of the persons holding senior management positions (including their passport or identification number, country of issue, date of issue, expiry date).

Trustees and Nominee Managers

For a company with a shareholder or partner that acts as trustee, or that has a nominee manager, meaning a person that is acting on the instructions of another person, the Shareholder/Partner Register must include information about such trustee or nominee manager. The information to be included for a trustee or nominee managers is the same as for a Real Beneficiary. 

Authorised Discloser

Companies must also provide its licensing authority with the name, address, contact information and ID copy of an individual, who must be a UAE resident, and who is authorised to disclose to the licensing authority the information required by the UBO Law.

Reporting deadline

The UBO Law requires companies to file the Registers with their relevant licensing authority by 27 October 2020. Companies must make sure that the Registers are maintained and updated, and that any change to the information listed therein is reported to the competent licensing authority within 15 days.

Practical implications

The Registers are mandatory and all companies registered in the UAE (apart from the exempt categories mentioned above) must take action to set up and file the Registers on time to ensure compliance.

This should be a straightforward exercise for many companies, which will simply have to compile updated information to create and file the Registers. However, some companies will have to carefully review and consider their ownership and control structures to ensure that they properly identify their UBOs, as many will have internal agreements between shareholders/partners concerning control, rights, obligations and management, which may affect who is considered a UBO under the UBO Law.  

2. Economic Substance Regulations

What is it?

The UAE introduced regulations on economic substance requirements in 2019 through Cabinet Resolution No. 31 of 2019 and Ministerial Decision No. 215 of 2019 (together, the Previous Law). These have now been repealed and replaced by the ESR Law and its implementing regulations in Ministerial Decision No. 57 of 2020 (the Implementing Regulations).

The ESR Law requires companies carrying out certain activities designated as “Relevant Activities” to demonstrate that they have sufficient economic substance in the UAE. The amount that is considered sufficient for the purposes of the ESR Law is relative to the type and volume of the Relevant Activity undertaken by a company. 

Who does it apply to?

Type of entity

The ESR Law applies to corporate entities and unincorporated partnerships with a presence in the UAE (collectively, the Licensees).

It is worth noting that the new ESR Law now excludes natural persons, sole proprietors, trusts and foundations from its application. On the other hand, entities owned 51% by a UAE government entity are no longer exempt solely because they are majority owned by a government body.

Onshore/free zone

The ESR Law applies to onshore Licensees in mainland UAE and all of its free zones.

Relevant Activities

The ESR Law is concerned with income generated from the following activities (Relevant Activities):

1. Banking business
2. Insurance business
3. Investment fund management business
4. Lease-finance business
5. Headquarter business
6. Shipping business
7. Holding company business
8. Intellectual property business
9. Distribution and service centre business

What is required?

Notification

All Licensees are required to file notifications to disclose if they undertake and earn income from a Relevant Activity. Under the new ESR Law, such notification must be made to a new portal that will be set up by the Ministry of Finance.

It is important to note that the Previous Law required notifications to be made to the various free zone authorities or Ministry of Economy, and Licensees will be required to resubmit their notifications to the new portal once it is set up.

Economic Substance Requirements

A Licensee which undertakes a Relevant Activity and generates income from such Relevant Activity is required to prove that it has sufficient substance in the UAE, unless it is an exempt entity.

Exempt entities

The following Licensees are exempt from the requirement to show sufficient substance under the ESR Law:  

1. investment funds;
2. entities with a tax residence in a country other than the UAE;
3. entities wholly owned by UAE residents and that meet the following conditions:
   • the entity is not part of a group that includes entities subject to tax in different jurisdictions; and
   • all of the entity's activities are only carried out in the UAE;
4. branches of foreign companies whose income is subject to tax in a country other than the UAE.

It should be noted that exempted entities must still file a notification under the ESR Law, yet they are not required to demonstrate economic substance.

Reporting deadlines

The notification under the ESR Law must be made within six months from the end of a Licensee’s financial year.

The report demonstrating economic substance must be submitted within twelve months from the end of a Licensee’s financial year.

Practical implications

There is some confusion about who the ESR Law applies to and what Licensees must do. In short, all companies and unincorporated partnerships that are registered in the UAE must file an ESR notification with the Ministry of Finance’s portal.

The trigger points for having to demonstrate economic substance under the ESR Law are 1) undertaking a Relevant Activity and 2) generating income from that Relevant Activity, unless the Licensee is an exempt entity, in which case the Licensee is not required to demonstrate economic substance.

Conversely, a Licensee that undertakes a Relevant Activity, but does not generate income from that activity is not required to meet the economic substance requirements set forth in the ESR Law during that financial period. If and when it starts generating income, substance will have to be shown.

Furthermore, a Licensee that carries out and earns income from a Relevant Activity through a branch registered outside the UAE is not required to demonstrate economic substance if the income earned through the branch is taxed in a jurisdiction outside of the UAE.

The ESR Law and its Implementing Regulations contain guidance on what is required to meet the substance requirements, which to a large extent will depend on the type of Relevant Activity a Licensee is undertaking. In general, Licensees that carry out Relevant Activities, and which are fully operational in the UAE, should not face a problem demonstrating substance under the ESR Law.

On the other hand, many groups will have to reconsider their structures in light of the ESR Law. It has become common in the UAE to create group structures with shell companies that exists only as profit centres or to hold equity or intellectual property (IP). If these holding companies generate income, they will now run into problems under the ESR Law.

While pure equity holding companies are subject to a lower threshold of economic substance requirements, they are still required to show some substance, which will give rise to costs that Licensees did not have to account for previously.

IP holding companies may be subject to a heightened economic substance test in certain instances. The heightened substance requirements will impact most groups that have created vehicles to ring-fence their IP, and which license that IP to other group entities for consideration. This type of structure is designated as high risk under the ESR Law and creates a presumption of non-compliance that the company has to provide substantial evidence to refute in order to avoid penalties under the ESR Law.

Conclusion

The UBO Law and ESR Law signal the UAE’s focus on promoting transparency, sound corporate governance and discouraging profit shifting and improper tax practices. These laws are broad in application and require all companies in the UAE to at least evaluate whether they are required to take any action. Most companies will at a minimum be required to make a filing or disclosure of some sort, yet many will find themselves having to carefully review and reconsider their structure and operations.

Please reach out to our team in the Dubai office if you have any questions or concerns about the matters discussed above.