Economic Substance – Huge opportunity for the UAE

Introduction

At the end of 2017, the European Union reacted to the reality that many foreign companies were very successful in Europe making billions of profits but paying very little tax as they were companies from some Caribbean islands or other low or no-tax jurisdictions. The EU requested that all companies need to have some substance in the form of real offices, with real employees and that the management decisions are to be taken at those places.

This can be quite difficult for countries like the British Virgin Islands, well known in financial circles under its abbreviation BVI, with a population of about 30,000 people. It became a leader in the offshore field when it welcomed the law firms and trust companies from Panama at the end of the 80s whose reputation suffered under the dictator Noriega. The BVI had already at that time a very suitable and efficient legislation and Panama lawyers started to recommend them through their offices in London, Zurich, Geneva, Singapore, Hong Kong. The advantages of the BVI companies or IBCs, International Business Companies, which could be established within a day lead to a huge demand and in the last few decades more than a million of such companies were established and the legislation copied by a dozen other jurisdictions.

I lived there for five years and was running a leading Swiss / Liechtenstein bank. Only very few BVI companies had a physical address in its capital Road Town on the island Tortola and the companies were maintained by their registered agents.

Economic Substance Enforcement

In November 2018, the Organization for Economic Cooperation and Development (OECD) announced a new global standard on Base Erosion and Profit Shifting (BEPS): that mobile business income cannot be parked in a zero-tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location.

These offshore companies did not reflect any real company activity. Many offshore jurisdictions started to enact Economic Substance Regulations, often abbreviated as ESR, introducing enhanced economic substance requirements for tax purposes. But they had difficulties adapting to all the European requirements, as many just don’t have the infrastructure nor the manpower to accommodate all these companies with a physical presence. In addition, many citizens of those island were against a large inflow of qualified foreigners to run all those companies.

Migration of Companies

At the same time, UAE free zones, which up to then did not permit the transfer of companies, started to allow it, which opened the possibility to accommodate companies from the Caribbean and other places. This opened huge possibilities for the UAE, as it is an ideal location for such migration. The UAE is welcoming anybody to take up residence be it natural persons or juridical persons. Currently about 90 percent of the population are foreigners and looking at all the real estate plans where thousands of apartments and villas are built even more foreigners will move to the UAE.

The UAE also follows its policy of being neutral. In addition, several oil and gas exporting countries started recently to allow trading its goods in other currencies than the US dollar and by focusing more on their main customers in Asia. This resulted in many companies to migrate to the UAE, where it is easy to find office space for one person or up to hundreds of persons. The most expensive setups are in Dubai and the further away you go, the cheaper it gets.

Initially, the management of such companies might be reluctant to move to the UAE, but when they see the advantages the UAE offer, how well foreigners are welcomed, and that no personal income tax needs to be paid, the easier it gets to make such a decision.

A main issue for the reluctance of moving to other countries is often the language and the difficulty of getting the necessary schooling for the kids. Dubai is well prepared for this with more than 300 private schools from Kindergarten to university level in all kind of languages to easily accommodate different needs.

Often a family moves because one of the parents got a good job offer. This means in many destinations that for the other part it could be difficult to get a work permit and to find a job. However, in the UAE, anybody can get a job. Perhaps it will not be in the preferred business sector and the salary might be lower than expected. The expanding real estate sector is always in need for agents with the possibility of becoming a millionaire or perhaps just barely survive.

Many are also attracted that it is now easy to get a freelance visa and that it is not necessary to setup an expensive UAE company.

This migration of companies underscores the UAE's growing prominence as a global hub for legitimate and substance-based economic activity. The UAE is at the crossroads of Europe, Asia, and Africa, and acts for several decades as a hub for trade and investment where a population of three billion people can be reached with a flight of four hours. It always quickly adapts to the changing world and has now become a hub as well for economic substance compliance. It was also quick in becoming an attractive destination for entrepreneurs and investors in the crypto / blockchain field, where many companies from the crypto valley in Switzerland have setup subsidiaries in the UAE or moved the whole operation to the dynamic UAE.

The UAE has implemented robust economic substance regulations in line with international standards, designed to enhance transparency and promote fair taxation. This commitment to economic substance is particularly appealing to multinational corporations and international investors looking for a legitimate and compliant tax environment.

Non-compliance with economic substance regulations can lead to significant penalties, which may include fines, restrictions on operations, or even the revocation of business licenses. Therefore, businesses must take these regulations seriously and ensure they meet the necessary requirements.

A main advantage of the UAE is its political stability: The UAE boasts a stable political environment, providing businesses with the confidence and security needed for long-term growth and investment. The country's commitment to economic diversification and modernization further enhances its attractiveness.

Dubai offers an excellent quality of life with a cosmopolitan lifestyle, world-class healthcare, and diverse cultural experiences, making it an attractive destination for professionals and expatriates.

Conclusion

In summary, the UAE's commitment to economic substance regulations, coupled with its strategic advantages, has made it a prime destination for businesses looking to establish a genuine presence while optimizing their financial strategies. As the global landscape evolves, the UAE's appeal is likely to continue attracting companies seeking a compliant and advantageous business environment.

Moreover, the migration of companies from Caribbean jurisdictions to the UAE highlights the growing recognition of the UAE's compliance and business-friendly environment. Businesses worldwide will continue to explore the opportunities and advantages offered by this dynamic and forward-thinking jurisdiction.

This is a huge advantage for lawyers and corporate service providers in the UAE and opens a new business field in providing assistance for the migration of such companies.

Michael Lane, the head of the Swiss Legal Group Ltd. with an extensive experience in the UAE legal field, has summarised in detail the legal requirements concerning the UAE economic substance rules in the attached presentation.

UAE Economic Substance Rules Michael Lane, notification obligations-2

Urs Stirnimann

Chairman

Swiss Academy