Economic Substance Notification in UAE; Addressing your key concerns
Jay Krishan, Partner
Economic Substance Regulations Reporting Period:
The Reportable Period is always the financial period preceding the financial period in which the Economic Substance Notification is due.
Reportable period is the financial year defined in the Memorandum and Articles of Association of the Entity. In case the entity doesn’t have Memorandum and Articles of Association as part of incorporation, for example, sole proprietorship, etc., then the financial year can be defined in the form of a Board Resolution.
Different Free Zones in UAE issued separate guidance on reporting period and the entities should follow such circulars or economic substance notifications from relevant Free Zone authorities. If there are no specific circulars on the reportable period, it’s suggested to follow the provisions issued by the ministry of economy.
For Mainland companies in UAE, a reportable period ending on or before the due date of notification as prescribed in the circulars should follow.
- A Licensee whose financial year corresponds to the calendar year would include the following:
Start date: 1 January 2019 End date: 31 December 2019
- A Licensee incorporated on 1 July 2019 with a 31 March 2020 financial year-end, would include the following:
Start date: 1 July 2019 End date: 31 March 2020
An entity incorporated in January 2020 with financial year ending with December 2020 – such entities are not required to comply with the economic substance notification deadline of 30 June 2020 and for free zone entities, it’s recommended to verify and follow the circulars or guidelines issued by the relevant free zone authorities.
What if an entity holds 2 licenses from same license issuing authorities?
Each Licensee must file an Economic Substance regulation Notification on a stand-alone basis, irrespective of whether the Licensee is part of a consolidated group for accounting purposes.
Economic Substance Regulation Notification should be conducted for each license separately.
If an Entity holds 2 separate licenses which carry different license numbers, but with the same/different name of the entity and with one set of incorporation statutes, then its highly recommended to notify separately with each license, unless the Relevant Authority comes up with a separate guideline on this.
Who needs to submit a Economic Substance Notification?
An Economic Substance regulation Notification must be filed if you are a UAE business that undertakes any of the following Relevant Activities during the relevant accounting period;
- Banking business
- Insurance business
- Investment fund management business
- Lease and finance business
- Headquarter Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Centre Businesses
However, the entities that operate in the mainland of UAE engaged in the above activities holding a valid licenses from relevant authorities (example: central bank of UAE, etc) should notify to such authorities.
Most of the free zone authorities in UAE has given the mandate to the entities to notify on all relevant activities with the free zone authorities through the form issued by such authorities. However, certain free zones issued a separate guideline on who should be the relevant authority for notification purposes, and its recommended to follow such circulars or notifications.
Substance over form approach:
A ‘substance over form’ approach must be used to determine whether the Licensee carried on a Relevant Activity. This means looking beyond what is stated on the commercial license, trade license, or permit to the activities actually undertaken during the Reportable Period. Income from a Relevant Activity means all gross income earned from that activity as recorded in the books and records of the Licensee for the Reportable Period prepared under applicable accounting standards, including income that is generated outside of the UAE.
A licensee conducts additional business from Intellectual Property rights and the license issued by the authorities are for commercial activities – for the notification purpose of Economic Substance Regulations(ESR), the licensee should notify under both the activities.
Passive and non-recurring income will also qualify for notification for Economic Substance Regulations.
Fully or partly subject to tax in a jurisdiction other than UAE
Please indicate whether the gross income from the Relevant Activity(ies) was fully or partially subject to tax in a jurisdiction other than the UAE. For example, income from a Relevant Activity could be subject to tax outside the UAE if the Licensee has a taxable presence / permanent establishment in a foreign country that reports all or part of the income from the Relevant Activity in its tax return.
Such provisions should be read in conjunction with the relevant tax laws and provisions prevailing in such countries on residence and taxability on foreign incomes and its highly recommended to check in those countries before the economic substance notification filing in UAE.
Tax Resident in other countries?
A Licensee is regarded as tax resident in a jurisdiction other than the UAE if the entity is subject to corporate income tax on all its income from a Relevant Activity by virtue of its tax residence, domicile or any other criteria of a similar nature in that other jurisdiction. Where a Licensee notifies that it is tax resident outside the UAE, it will be required to provide the Regulatory Authority with appropriate evidence to support that foreign tax residence. This may include copies of tax returns filed in the foreign jurisdiction, a tax residence certificate from the foreign jurisdiction, or proof of payment of corporate income tax paid in the foreign jurisdiction.
Such provisions should be read in conjunction with the relevant tax laws and provisions prevailing in such countries on residence and taxability on foreign incomes and its highly recommended to check in those countries before the economic substance notification filing in UAE
The dedicated contact person can be anyone who has the authority to respond to queries raised by and provide further documents to the Regulatory Authority. Examples of a “Designated Contact Person” include:- The Licensee’s General Manager;- The Licensee’s Director; or- The Licensee’s Compliance Officer.
It’s recommended ensuring the authority or mandate on the contact person through any document (example: commercial license/board resolution/Memorandum and Articles of Association etc)
Companies under liquidation:
Licensees that no longer have a commercial license, trade license or permit before the Economic Substance Regulation Notification filing deadline for a relevant Reportable Period are not required to file a Notification for the Reporting Period ending on the date of liquidation.
The license termination with the relevant authorities is important for this purpose and its highly recommended to ensure that the authorities have issued the license termination letter before the notification due date, for availing the exemption on the notification. “Under liquidation” companies as on the due date of notification are recommended to complete the notification.
Providing incorrect or false information in the Economic Substance Notification is subject to penalties ranging from AED 10,000 to AED 50,000. Knowingly providing incorrect or false information or incorrectly claiming an exemption from the Economic Substance Regulations can result in the Licensee being deemed to have failed the Economic Substance Test for the relevant accounting period.
Whilst every effort has been made to ensure the accuracy of this information, HLB HAMT will not accept any liability arising out of errors or omissions. Please note that this blog is not all-inclusive. Our guidance is designed only to give general information on the issues/topics covered. It is subjected to change and not intended to be a comprehensive summary of all laws which may be applicable to your situation.
ESR Audit in UAE
As part of the UAE’s commitment as a member of the Organization for Economic Co-operation and Development (OECD) inclusive framework, and in response
Update on ESR in UAE – ESR Applicability, Penalties and Exemptions
Ever since the introduction of ESR, people have been raising queries about numerous factors. In this video, we clear them.
Get in touch
Whatever your question our team will point you in the right directionStart the conversation