Businesses in the UAE undergo strict compliance checks on a regular basis. In fact, the high benchmarks for compliance are one of the many reasons why the UAE has managed to experience the growth it has. While the government here is all for supporting businesses and helping them grow, they are equally focused on maintaining international standards. Anything that does not meet the benchmarks is off the table.
That’s why it is best to have a compliance checklist for companies by your side while you are establishing a company here in the UAE and running it. The compliance checklist for companies is an easy way to ensure that you are operating well within the guidelines and, thus safe from fines and penalties.
Today, we will be explaining the requirements for three important compliance areas: VAT, ESR, and UBO. Let’s take a look at each of them in detail.
Value Added Tax (VAT)
The UAE introduced Value Added Tax to its system in January 2018 at a standard rate of 5%. It was introduced as a way to provide the country with a new source of income and reduce its dependence on incomes from oils and other hydrocarbons. The Federal Tax Authority (FTA) is the one responsible for looking after the VAT.
Here’s what you need to know about VAT compliance in the UAE:
The mandatory registration threshold for VAT is AED 375,000, meaning if your company’s taxable supplies and imports exceed AED 375,000, you have to register for VAT.
There’s also a voluntary registration threshold of AED 187,500. So, if your company’s taxable supplies and imports exceed AED 187,500 but are under the mandatory registration threshold, you may choose to register for VAT.
Additionally, if your expenses as a company exceed the voluntary registration threshold, you are still eligible to apply for VAT. This initiative is particularly designed for startups with no turnover.
Your Responsibilities As a Company
Registering for VAT is just one of the checkboxes in the compliance checklist for companies. Once you tick that off, there’s more to tick to make sure you are well within the regulations. Take a look below:
- Companies registered for VAT must charge VAT on taxable goods and services they supply
- Reclaim any VAT they have paid on business-related taxable goods or services
- Keep their financial records and transactions up to date for scrutiny
- Report the total amount of VAT you have charged and VAT you have paid regularly to the government.
If you have charged more than you have paid, you need to pay the difference to the government. However, if it’s the other way around, that is, you have paid more than you have charged, and you can reclaim the difference.
Companies in the Real Estate Sector
VAT in real estate depends on whether it’s a commercial or a residential property. Supplies for commercial properties, including sales and leases, are subjected to the standard 5%. Residential properties are exempted from VAT.
Furthermore, to make sure that developers recover the VAT they pay on construction materials for residential properties, there is a zero rate VAT on the first sale of residential property within 3 years of completion. Similarly, bare land, without any permanent structure, is exempted from VAT.
Some of the eligible expenses for VAT recovery in the real estate are:
- Construction costs (commercial properties)
- Maintenance and repair service
- Fees for property management
- Expenses for marketing and advertising
It is important to note that free zones may have specific VAT treatments. Thus, it is best to check with the FTA for rates.
Zero-Rated Sectors
Some sectors are rated at 0% for VAT. This means that businesses can reclaim VAT paid on purchases related to these zero-rated VAT sectors. These include:
- Goods and services exported outside of the Gulf Cooperation Council
- International transport and related supplies
- Certain means of transportation, like aircraft and ships
- Investment-grade precious metals like gold
- Specific education services and goods
- Specific healthcare services and goods
VAT-Exempted
In VAT-exempted sectors, no VAT is charged or reclaimed. It includes the following:
- Financial services clarified in VAT legislation
- Residential properties
- Bare land
- Local passenger transport
Summary
| VAT Rate | Standard 5% |
| Mandatory threshold | AED 375,000 |
| Voluntary threshold | AED 187,500 – AED 375,000 |
| Categories | Standard VAT
Zero-Rated VAT VAT-exempt |
| VAT Filing | eservices.tax.gov.ae |
| Monthly Filing | Companies with an annual turnover exceeding AED 150 million |
| Quarterly Filing | Companies with an annual turnover of less than AED 150 million |
| VAT Filing period | Within 28 days from the end of the tax period |
Economic Substance Regulations (ESR)
Economic Substance Regulations (ESR) require all companies who carry out ‘relevant activities’ to maintain an adequate economic presence in the UAE.
The government issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019) in April 2019, following their commitment to the OECD Inclusive Framework and an assessment of UAE’s tax system by the European Union Code of Conduct Group on Business Taxation. Furthermore, following Cabinet Resolution No. 57 of 2020, the Federal Tax Authority is now the national assessing authority for ESR.
Let’s break it down.
What’s Included in Relevant Activities
Entities that conduct one or more activities mentioned below are subjected to ESR:
- Banking
- Insurance
- Investment fund management
- Lease-finance
- Headquarters
- Shipping
- Holding company
- Intellectual property
- Distribution and service center
To identify if a company is carrying out our relevant activities, the officials will take a ‘substance over form’ approach. It needs to be carried out for individual entities, and there is no minimum income threshold.
What Does Adequate ‘Economic Presence’ Mean
The compliance checklist for companies that are involved in ESR includes maintaining an adequate economic presence. This entails:
- Having a physical office or workspace
- A sufficient number of full-time employees residing in the UAE
- Operating expenses which show actual local business activity
Having a business address without actual operations is no longer considered sufficient.
Compliance with Tests
Besides meeting the requirements for economic presence, companies need to satisfy three Economic Substance Tests. These are:
- Core Income Generating Activity (CIGA) test
- Directed and Managed test
- Adequacy’ test
While businesses operating in high-risk intellectual property undergo enhanced ES tests, holding companies face reduced ES tests. Furthermore, if you fail to satisfy the ES tests, the UAE government may share this information with relevant foreign authorities.
Risks of Non-Compliance
Non-compliance with ESR invites hefty penalties. Take a look at the table below:
| Failure to file a notification | AED 20,000 |
| Failure to file the report | AED 50,000 fine + deemed a failure to meet ES Tests |
| Failure to offer accurate or incomplete information | AED 50,000 + deemed a failure to meet ED Tests |
| Failure to meet the ES tests in the 1st year | AED 50,000 + information exchange with foreign competent authorities |
| Failure to meet the test in the 2nd year | AED 40,000 fine + information exchange + suspension, cancellation, or non-renewal of the trade license |
Ultimate Beneficial Ownership (UBO)
An Ultimate Beneficial Owner is an individual who owns or controls 25% of the company’s shares or voting rights. These individuals benefit from the business even if their ownership is not direct.
In order to align with international anti-money laundering (AML) and counter-terrorism financing (CFT) standards, the UAE decided to introduce UBO regulations. It helps to ensure transparency and combat financial crimes. Moreover, it makes financial transactions traceable and identifies real company owners.
Different Types of UBOs
UBOs include a wide variety of individuals and entities. These are:
- Direct owners
- Indirect owners
- Controllers
- Economic beneficiaries
- Trustees and nominees
- Senior management
Who Needs to Comply?
UBO applies to all businesses in the UAE. This means that all companies on the mainland and free zones need to maintain a register of their UBOs. Additionally, they need to submit this data to relevant authorities. And if there’s any change, it should be immediately reported.
Who’s Exempted?
Yes, certain companies are exempted. They include:
- UAE government-owned entities
- Companies listed on recognized stock exchange
- Financial authority-regulated entities
Penalties for Non-Compliance
If you don’t comply with these regulations, your company may be subjected to:
- Fines (AED 50,000 to AED 1,000,000)
- Suspension of company license
- Legal action and financial penalties (repeat violations)
For a full breakdown of UBO violations and penalties, refer to the official UBO guidance by UAE authorities.
Conclusion
This compliance checklist for companies is just what you require to understand what VAT, ESR, and UBO entail, who needs to register for it, when, what they need to do, and how grave the penalties are.
It is important to remember at all times that the UAE government makes no compromises regarding laws and regulations. It deals with non-compliance strictly and may cancel your license for repeated offenses. If you wish to build your company and grow here in the UAE, start by ensuring that all your activities are compliant.
HRSG is a global, world-class business solution provider offering services in three broad categories: people solutions, business solutions, and finance and accounting solutions. With more than 30 years of experience backing us and an ISO 27001-compliant certificate, we are here to support your business growth.
