UAE Economic Substance Regulations (ESR)

UAE Economic Substance Regulations | Economic Substance Regulations (ESR)

UAE Economic Substance Regulations

UAE Economic Substance Regulations (ESR) are in force. Economic Substance Regulations (ESR) is applicable on all the businesses in UAE.

The regulations have been issued in response to European Commission concerns which resulted in the UAE being added to the European Union list of non-cooperative tax jurisdictions. The regulations should also assist in further aligning UAE’s legislative framework to the standards set out in the OECD Base Erosion and Profit Shifting (BEPS) action plan.

All UAE entities will need to examine whether they meet the ‘economic substance’ requirements and consider how they will comply with the regulations, either by bolstering UAE economic substance or restructuring.

When do the economic substance regulations apply from?

The regulations apply from the date of issuance of the Resolution, i.e. 30 April 2019

Activities that fall under Economic Substance Regulations in the UAE?

Any UAE entity that undertakes “Relevant Activities” which consist of any of the following businesses licensed in the UAE, (mainland and/or free trade zones):

— Banking
— Insurance
— Investment fund management
— Lease finance
— Headquarters
— Shipping
— Holding company
— Intellectual property
— Distribution and service centers

Commercial companies that have any level of direct or indirect government (state and/or federal) ownership are currently out of the scope of the Regulations.

Your business may also be required to file an economic substance return (“ES Return”), within 12 months of your financial year end, to demonstrate that your business meets the ESR requirements. Information relating to the ES Return will be issued in the second half of 2020.

What is the Economic Substance Test?

The Economic Substance Test requires a DIFC entity to demonstrate that:

  • the DIFC entity and the Relevant Activity are being directed and managed in the UAE;
  • the relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE; and
  • the DIFC entity has adequate employees, premises and expenditure in the UAE.

What are the economic substance requirements?

Where an entity is undertaking Relevant Activities the following requirements apply:

—   The entity must undertake its key business activities in relation to relevant activities (“core income-generating activities” (CIGA) in the UAE. Details on what constitutes CIGA for each relevant activity are set out in the regulations.  

—   The entity must be directed and managed in the UAE in relation to CIGA.

—   The entity’s activities must be carried out with adequate local “economic substance” with regard to the level of relevant activity in the UAE. Economic substance consists of:

 –  Full-time employees
 –  Expenditure
 –  Premises

—   Entities will also be required to provide certain information to their regulatory authority annually, within a year of the financial year-end. If the entity is undertaking relevant activities it will be further required to submit a detailed report to the regulatory authority in relation to various aspects of the economic substance it maintains in the UAE, including a self-declaration that the economic substance requirements are met. 

What is required under the Economic Substance Regulations?

Every Licensee which carries out one or more of the Relevant Activities must submit a notification to the appropriate regulatory authority as set out in the Economic Substance Regulations.

In addition, for every financial period, any Licensee that carries out one or more of the Relevant Activities and derives income from the Relevant Activity in the UAE will be required to satisfy an “economic substance test” and submit an economic substance report with the appropriate regulatory authority within 12 months from the end of the relevant financial period. 

An exemption applies to companies that are at least 51% directly or indirectly owned by the Federal or an Emirate government or a UAE-based government body or authority.

The appropriate regulatory authority varies depending on the type of Relevant Activity and the location in which it is undertaken. Each regulatory authority will set out the form of the reports to be filed and the mechanisms for submitting such forms.

Penalties under the UAE Economic Substance Regulations?

  • Failure to file a Notification – penalty of AED10, 000 – AED50, 000
  • Failure to provide accurate or complete information – penalty of AED10, 000 – AED50, 000
  • Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year.

1. penalty for first year:

(a) AED10, 000 – AED50, 000; and

(b) information exchange with foreign competent authority of:

(i) Parent company;

(ii) Ultimate parent company; and

(iii) Ultimate beneficial owner

2. penalty for second consecutive year of failure:

(a) information exchange (see 1(b) above);

(b) penalty of AED100, 000 – AED300, 000; and commercial license could be: suspended, withdrawn or not renewed

How we can help

If you haven’t yet considered the impact of the UAE Economic Substance Regulations on your company/ branch in the UAE and require any of the below:

  • Assessment on whether you fall within the rules
  • Assessment on whether you can satisfy the Economic Substance test
  • Notification filing assistance

Our experienced team will be happy to analyze your business activities, determine whether you are within the rules and guide you as to what actions are required to ensure full compliance. 

Note that the final date for Economic Substance Regulations Notification is June 30, 2020.

What Xact Auditing offers?

  • Consulting on Economic Substance Regulation (ESR)
  • Identify the qualifying entities for Economic Substance Regulation(ESR) compliance
  • Identify the qualifying business segments for Economic Substance Regulation(ESR) compliance
  • Report and advise on overall Economic Substance Regulation(ESR) readiness by the Entity
  • Ongoing Economic Substance Regulation(ESR) compliance
  • Secretarial services in connection with Economic Substance Regulation(ESR) record maintenance
  • Economic Substance Regulation(ESR) filing with the authorities in the proper /prescribed format
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