Economic Substance Regulations in UAE

Have you set up your company in line with UAE Economic Substance Regulations? If you have not yet, do it now – because if the looming deadline passes, be prepared to pay a hefty fine!
Applicable laws & Purpose

The United Arab Emirates enacted the UAE Economic Substance Regulations on 30th April 2019, which requires companies to have substantial activities in a jurisdiction, taking into account the global standards developed by the OECD and the EU for business taxation to curb harmful tax practices and be removed from the EU’s list of non-cooperative tax nations.

The purpose of the Economic Substance Regulations is to ensure -that UAE entities which undertake certain activities are not used to artificially attract or shift profits that are not proportionate to the economic activity undertaken in the UAE– by setting up the criteria that confirm that the Licensee is carrying out an activity in the UAE that achieves economic substance interest.

  • Cabinet of Ministers Resolution no. 31 of 30th April 2019 concerning UAE Economic Substance Regulations.
  • Ministerial Decision no. 215 of 11th September 2019 on the Issuance of Directives for the Implementation of the Provisions of the Cabinet Decision No. 31 of 2019 Concerning the UAE Economic Substance Regulations Requirements.
  • Cabinet Resolution no. 58 of 4th September 2019 Determining the Regulatory Authorities Concerned with the Business Mentioned in Cabinet Resolution No (31) of 2019 Concerning Economic Substance Regulations in UAE.
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First reportable period

  • The UAE economic substance regulations (ESR) apply to entities with a financial year commencing on or after 1 January 2019.
  • An annual notification requirement (from 1st Jan 2020) is applicable to an entity that undertakes a Relevant Activity (irrespective of whether the entity qualifies for an exemption under the Regulations or has earned income from the Relevant Activity during the relevant financial period) -;
  • In addition, entity that undertakes and earn income from a Relevant Activity, and is not exempted under the Economic Substance Regulations, is also required to file an Economic Substance Return (within 12 months from the end of its relevant financial period).
  • The Deadline for the First UAE Economic Substance Regulations Notification was on June the 30th, 2020*. All companies were mandated to ascertain their eligibility within the scope of the Economic Substance Regulations (ESR) Test before the deadline.
Who is subject to the UAE Economic Substance Regulations (ESR UAE)?

The Economic Substance Regulations require UAE onshore and free zone companies, including offshore companies, branches, partnerships and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence”in the UAE relative to the activities they undertake:

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management Businesses
  • Lease-Finance Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Headquarter Businesses
  • Distribution and Service Centre Businesses

The UAE Economic Substance Regulations apply not only to UAE entities that are part of a foreign multinational group, or that are owned by a foreign shareholder but on any UAE entity which carries on a Relevant Activity, regardless of whether the UAE entity belongs to a foreign multinational group.

The Economic Substance Regulations apply to a limited liability company, a private shareholding company, a public shareholding company, a joint venture company, a partnership (a limited liability partnership, a limited partnership, a general partnership, etc.), but does not apply to a natural person, sole proprietorship, trust, and foundation.

Who is exempt?

A Licensee- any commercial company- that is directly or indirectly owned 51% or more by the UAE government is no longer specifically exempt.

Exempted Licensees for the Economic Substance Regulations in UAE are:

  1. An Investment Fund.
  2. A tax resident in a jurisdiction outside the UAE.
  3. An entity is wholly owned by UAE residents and that (i) does not form part of a multinational group, and (ii) only exclusively carries out business activities in the UAE.
  4. A branch of a foreign entity whose relevant income is subject to tax in the jurisdiction of the foreign entity.
How to meet Economic Substance Regulation Test?

UAE company operating in any relevant activities must satisfy all the below economic substance requirements of the Regulations (including but not limited to) demonstrating that:

  • It conducts its core income-generating activities (CIGA) in the UAE.
  • It is managed and directed in the UAE with regards to its CIGA;
  • It possesses an adequate number of qualified full-time employees in relation to its activity and who are physically present in the UAE, or that sufficient expenditure is incurred in out-sourcing to third parties in the UAE whose activities, employees, expenditure and premises are adequate for carrying out the Relevant Activity being outsourced in the UAE;
  • It incurs adequate operating expenditure in the UAE or that adequate expenditure is incurred in out-sourcing to third parties in the UAE who meet the economic substance requirements of the UAE; and
  • It has adequate physical assets or levels of expenditure on outsourcing to third parties in relation to the CIGA in the UAE.
  • If for its outsourced CIGA, if any, it has full control and is be able to monitor the activities of the service provider.
What are the penalties for non-compliance?

Non-compliance with the Regulations may lead to administrative fines and sanctions which include:

  • A fine of up to AED 20,000 for failing to file an economic substance notification;
  • A fine of up to AED 50,000 for filing incorrect information;
  • A fine of up to AED 50,000 for failing to submit an economic substance report;
  • A fine of up to AED 50,000 for failing to meet an economic substance test in respect of a financial year after an initial notice of failure;
  • A fine of up to AED 400,000 if failure continues in the second consecutive year;
  • Sharing of information regarding the non-compliance with tax authorities in the foreign states where the affected companies are incorporated or in which their parent company, ultimate parent or ultimate beneficial owner are resident; and,
  • Suspension, revocation or non-renewal of a licence.
  • The UAE Federal Tax Authority (FTA) was appointed as the National Assessing Authority and is responsible to assess whether licensees have met the economic substance tests, impose administrative penalties for non‑compliance; and decide on appeals filed by licensees, amongst others.
How can Wincore Advisory Group assist you for assessment on Economic Substance Regulations in the UAE?
  • Preliminary Assessment: Identify whether your business is within the scope of the regulations.
  • Core Assessment: If within the scope of the Regulations, check whether your business pass the Economic Substance Test.
  • Defaults Assessment: Identify the non-compliant elements if criteria of Regulations are not met.
  • Rectification Procedure: Suggestions to correct the weaknesses in order to pass the Economic Substance Test.
  • Submission of reports: Filing the notification, returns and reports to the Relevant Regulatory Authority.

For Assessment on Economic Substance Regulations in UAE

Contact Person:

Mohammed Rahali

Wincore Advisory Group

Managing Partner
M: +971 (0) 55 138 9591
T: +971 (0) 42 212 6 02

m.rahali@wincoreadvisory.com

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