Economic Substance Regulations UAE - FAQ
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Ever since the introduction of economic substance regulations in the UAE, people have been raising queries about numerous things related to it. Here we have listed below a set of questions and answers about economic substance regulations in UAE.
Can the Economic Substance regulations (ESR) applicability be concluded based on the Trade license?
No. Whilst the commercial license may indeed state the Relevant Activity, a ‘substance over form approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the Regulations. This means looking beyond what is stated on the commercial license to the activities actually undertaken by the Licensee during a financial period.
If the business carried on a Relevant Activity, it will be required to comply with the Regulations, irrespective of the activities stated on the commercial License.
Is a company registered under an ‘offshore’ free zone company regime subject to the Regulations?
Yes, if the ‘offshore’ company undertakes a Relevant Activity.
What is the frequency of the compliance?
If a Licensee performs any one of the relevant activities, then the submission is mandated annually i.e., for each financial period.
How should a Licensee determine its financial period for Economic substance purposes?
A Licensee’s financial period should correspond to the period for which financial statements (if any) are prepared to. Newly incorporated Licensees may have either a short or long first financial period.
What if a Licensee does not undertake a Relevant Activity during a financial period?
If a Licensee does not undertake a Relevant Activity during a financial period, it does not need to meet the Economic Substance Test. The Licensee would not be required to submit a Notification or submit an Economic Substance Report for the relevant financial period.
Are branches subject to the Regulations?
Branches registered in the UAE are an extension of their “parent” or “head office” and do not have separate legal personalities. As such, the “parent” or “head office” registered in the UAE must file as a single Licensee, reporting the Relevant Activities of itself and all its branches in one composite Notification and/or Economic Substance Report.
Is UAE branch of a foreign entity subject to Regulations?
A UAE branch of a foreign entity that carries out a Relevant Activity would be required to comply with the Regulations as if it was a separate legal person unless the Relevant Income of the branch is within the scope of taxation in the jurisdiction of the foreign parent/head office. The “subject to tax” test is met where the income of the UAE branch is taken into account when calculating the taxable income of the foreign parent/head office or other relevant group entity reporting the Relevant Income of the UAE branch for corporate income tax purposes.
What if a Licensee undertakes a Relevant Activity, but does not earn any income from that activity during a financial period?
A Licensee that undertakes a Relevant Activity but that does not earn income from this activity in a financial period, is required to submit a Notification on the Ministry of Finance filing portal. The Licensee will not be required to meet the Economic Substance Test or file an Economic Substance Report for that period.
Is there a minimum level of income that must be met for the Economic Substance Regulations to apply?
No, there is no minimum income requirement or threshold. If you carry out a Relevant Activity you are required to submit a Notification.
Is having a UAE Tax Residency Certificate for a financial period proof of meeting the Economic Substance Test for that relevant period?
No, whilst obtaining a UAE Tax Residency Certificate requires a certain minimum presence in the UAE, a UAE Tax Residency Certificate in itself is not proof of a Licensee having adequate economic substance in the UAE in relation to its Relevant Activity and the income earned from this activity.
What if the Licensee carried on a Relevant Activity historically but no longer does, is the Licensee required to submit a Notification and Economic Substance Report every year until liquidation?
No, a Licensee is only required to file a Notification and Economic Substance Report in respect of financial periods where a Relevant Activity was carried on. There may be instances where a Licensee may be required to file for one year but not the following year.
If my business carries out multiple Relevant Activities should I submit individual Notifications and Economic Substance Reports for each Relevant Activity?
No, businesses that have more than one Relevant Activity during a financial period should submit a single Notification and Economic Substance Report and report all their Relevant Activities in that single Notification and Economic Substance Report.
Are there cases where a business is only required to submit a Notification and not file an Economic Substance Report?
Yes, if the Licensee is an Exempted Licensee or does not earn income from its Relevant Activity. In these cases, there is no requirement to file an Economic Substance Report.
The Economic Substance Filing Portal will automatically assess whether you need to file an Economic Substance Report based on your Notification, and only create a Report if you are required to submit one.
Will a business face a late filing penalty if its Exempted Status is denied after the original Economic Substance Report filing deadline for the relevant financial period?
No, if you submit a Notification claiming an exemption from the Economic Substance Regulations and this exemption is denied, you will be given 30 business days to submit your Economic Substance Report from the date the exemption claim was denied. Businesses that willfully, knowingly and intentionally submit improper exemption claims may face penalties.
I wanted to amend my Notification (or Economic Substance Report), how can it be done?
You can request to amend your Notification (or Economic Substance Report) by clicking on the
“Request for amendment” button next to the relevant case on the Licensee Dashboard.
This will send a request to your Regulatory Authority, who is responsible for approving your request. Once the request is approved, please click on the “Resubmit” button next to the relevant case on the Licensee Dashboard to access the editable Notification (or Economic Substance Report) form.
Do the Financial Statements to be submitted along with the Economic Substance Report need to be audited?
No. In the absence of audited financial statements, you can submit unaudited financial statements or management accounts.
Is a company that is registered as an offshore free zone company considered tax resident outside of the UAE for ESR purposes?
No, offshore free zone companies are subject to the Economic Substance Regulations in the same way as regular free zone companies or as a company established in mainland UAE.
Will my Regulatory Authority receive my Notification and Economic Substance Report through the Economic Substance Filing Portal
Yes, your Regulatory Authority will have access to all your submissions made on the Economic Substance Filing Portal. For further reading, please refer Economic Substance Regulations Frequently Asked Questions
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