UAE Economic Substance Regulations
Jay Krishnan & Sumesh Krishna
The UAE Cabinet recently issued the Cabinet of Ministers Resolution No.31 of 2019, which requires all in-scope UAE entities to maintain an economic substance. This will be applicable to onshore and free zone companies that engage in certain “Relevant Activities”.
Ever since the introduction of economic substance regulations in 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.
- Why has the UAE introduced Economic Substance Regulations?
The UAE was added to the European Union list of non-cooperative tax jurisdictions by the European Commission and this was the reason behind the issuance of the economic substance regulations. Economic Substance regulations are similar to the economic substance requirements that were recently implemented in jurisdictions that include the Cayman Islands and Jersey.The purpose of the Economic Substance Regulations is to ensure that UAE entities that undertake certain activities does not artificially attract profits.
- What is the first reportable Financial Year?
The Regulations apply to financial years starting on or after 1 January 2019. For a UAE entity with 1 January 2019 – 31 December 2019 financial year, the first assessable period would be the same time period and for an entity with 1 April 2019 – 31 March 2020 financial year, the first assessable period would be 1 April 2019 – 31 March 2020.
- Our company is in the shipping business. Should we file ESR notification?
UAE Economic substance regulation will be applicable to companies that engage in any of the below mentioned “Relevant Activities”;
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquarter Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Centre Businesses
- What are the requirements to meet economic substance test?
A Licensee meets the Economic Substance Test in relation to a Relevant Activity in the following cases:
- If the Licensee conducts State Core Income-Generating Activity in the State.
- If the Licensee is directed and managed in the State in relation to that activity, provided the Licensee’s board of directors meets in the State at an adequate frequency having regard to the amount of decision-making required at that level.
- Having regard to the level of Relevant Activity, if there is an adequate number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third-party service providers, whose activities, employees, expenditure, and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
- If there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third-party service providers whose activities, employees, expenditure and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
- If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third-party service providers in the State, for the activities of the Licensee;
- In the case of State Core, Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.
- Do the Regulations only apply to UAE entities that are part of a foreign multinational group, or that are owned by a foreign shareholder?
No, Economic substance requirements will be applicable to all entities that engage in relevant activities irrespective of the fact whether they belong to a foreign multinational group or not.In the case of a UAE based Distribution Business, Service Centre Business, Headquarter Business or High-Risk IP Business, the regulations will be imposed if the organization transacts with foreign group entities.
- Mine is an offshore company. Should I file ESR notification?
Yes, offshore companies that undertake relevant activities are subject to economic substance regulations.
- Who is exempt from the Regulations?
Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE Government body or authority need not comply with the economic substance regulations.
- Our company hasn’t undertaken any relevant activity during the financial period. Do we still need to file ESR notification?
Licensees that do not involve in a relevant activity during a financial period do not have to meet the economic substance test and will be exempted from the process of notifying the regulatory authority and submitting an economic substance return.
- Our company hasn’t generated any income from the relevant activity. Should we file ESR notification?
In cases like these, the licensee need not file an economic substance return for the relevant financial period but will have to submit a notification with the regulatory authority.
- If all income from the Relevant Activity is earned from outside the UAE, is the Licensee exempt from the Economic Substance Regulations?
No, the Licensee is not exempt from the Economic Substance Regulations.
- Will economic substance be assessed on a Licensee by Licensee basis, or can Licensees that are part of the same group elect to be assessed on a ‘consolidated’ basis?
No, each Licensee must comply with the Economic Substance Regulations and demonstrate economic substance individually.
- What are the deadlines for filing Economic substance regulation notification for UAE free zones?
Free Zone Authority Deadline Abu Dhabi Media Zone Authority 30th June ADGM 30th June Ajman FZ 30th June DAFZA 15th June DIFC 30th June DMCC 30th June Dubai Aviation City Corporation 7th June Dubai Development Authority 25th June Dubai Healthcare City 7th June Dubai World Trade Centre 30th June Fujairah Free Zone 15th June Hamriyah Free Zone Authority 30th June International Free Zone Authorities 30th June KIZAD 20th June Ministry of Economy 30th June RAK EZ 30th June RAK ICC 30th June SAIF 30th June Umm Al Quwain Free Trade Zone 30th June
- When is the last date to file ESR notification for mainland companies?
- What if I don’t file the ESR notification before the deadline?
Failure to comply with the ESR (including providing inaccurate or incomplete information) may result in a fine of between AED 10,000 and AED 50,000 in any fiscal year. The fines increase to between AED 50,000 and AED 300,000 for the subsequent fiscal year.
- My company is going into liquidation. Should we file ESR notification?
All licensees in liquidation should file a notification.DIFC has confirmed that organizations operating in the free zone that has been dissolved, struck-off or liquidated before the deadline for submission of the Notification need not file ESR notification.
Economic Substance Reassessment in UAE
UAE businesses, including the ones that had already filed ESR notification, are required to file or re-file ESR notification through MoF’s dedicated portal.
Amendments to the Economic Substance Regulations in UAE
There have been certain changes to the rules and regulations pertaining to economic substance regulations in the UAE.
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