The Economic Substance Regulations (ESR) were introduced in the UAE on 30 April 2019 pursuant to the Cabinet of Ministers Resolution No.31 of 2019 (“Regulations”). Following this, guidance on the application of these regulations was also introduced as per the Ministerial Decision No. 215 of 2019. As per the regulations, the UAE-based businesses that carry out the relevant activities listed in the guidance are required to demonstrate adequate economic presence by meeting the UAE economic substance test. The regulations mandate that the companies need to notify and submit an annual UAE economic substance report to the regulatory authorities if they are carrying out the relevant activities.
UAE ESR Reporting & Notification
The companies in the UAE that carry out the relevant activities need to notify the regulatory authority on an annual basis. They need to report,
- Whether they are carrying out a relevant activity in the UAE
- Whether any income is subject to tax outside the UAE
- The date of the financial year top of form
The companies need to submit an annual report to the Regulatory Authority every year to demonstrate if they are carrying out the relevant activity. It is mandatory to provide details of the activity, income, expenses, and assets that declare whether the UAE economic substance test is fulfilled. The companies need to submit the report to the Authority within 12 months of the end of each financial year.
ESR Requirements
The following are some of the major actions the companies need to undertake before the end of a financial period:
- Assessment of the Relevant Activities carried out during the financial period using substance over form approach
- Assessment of the amount and type of income generated from the Relevant Activity during the financial period
- Hold Board Meetings with the directors who are physically present in the UAE
- Sign and maintain the board meeting minutes in the UAE
- Determine the amount and type of expenses and the UAE-based assets related to the Relevant Activity
- The companies need to ensure that access to assets can be proved through agreements & financial records
- The companies need to determine the number of full-time employees (UAE-based) in charge of the Relevant Activities
- Demonstrate control and supervision of any outsourcing arrangements
Relevant Activities:
Economic Substance reporting regulations apply to the UAE businesses that carry out the following relevant activities.
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP”)
- Distribution and Service Centre Business
For the comprehensive guide on relevant activities for UAE Economic Substance regulations, click here
As per the regulations on Economic Substance Test Reporting in Dubai, UAE, the companies need not actively carry out the relevant activities. For example, the regulatory authorities would consider the passive receipt of income under a finance lease to conclude that a company is carrying out a Lease-Finance Business.
Business registered in the UAE can use the substance over form method to determine whether they undertake a relevant activity or not. This means the companies need to assess not only the activities associated with their commercial license or registration certificate but also the activities carried out during a financial period.
According to the regulations, businesses may undertake one or more relevant activities during the same financial period. And the companies need to demonstrate the economic substance in each activity unless the activities are ancillary to the main activity. The regulations also allow consolidating the ancillary activities under the main relevant activity which would ensure that no duplicate reporting takes place.
List of Regulatory Authorities
There are regulatory authorities that oversee the Economic Substance Test Reporting of the companies corresponding to each relevant activity. For the free zones and financial free zones, the regulatory authority is the respective competent free zone authority that oversees each of the activities. For the onshore companies, the following are the Regulatory Authorities:
- Banking Business
The UAE Central Bank is the concerned authority for the banking business.
- Insurance Business
For the companies that carry out the insurance business, the regulatory authority is the Insurance Authority for the insurance business regulated by the said authority.
- Investment Fund management Business
The Security and Commodities Authority is the regulatory authority for the Investment and Fund Management Business.
- Lease – Finance Business
The companies carrying out the relevant activities in Lease Finance Business should be reporting their economic substance to the UAE Central Bank.
- Headquarters Business
For the companies that carry out the Headquarters Business, the UAE Ministry of Economy acts as the concerned Regulatory Authority.
- Shipping Business
The companies that conduct the Shipping Business are regulated by the UAE Ministry of Economy.
- Holding Company Business
The Ministry of Economy is the concerned regulatory authority for the UAE companies that carry out the Relevant Activity of Holding Company Business.
- Intellectual property Business (“IP”)
The Intellectual Property Business activities are regulated by the Ministry of Economy for the purpose of Economic Substance Test Reporting in the UAE.
- Distribution and Service Centre Business
The UAE Ministry of Economy is the concerned regulatory authority for the companies that carry out Distribution and Service Centre Business.
Penalties
Non-Compliance Amended Penalty Amount
Failure to submit a Notification AED 20,000
Failure to submit an Economic Substance Report AED 50,000
Providing inaccurate information AED 50,000
Failure to pass ES Test for first year AED 50,000
Failure to pass ES Test for the consecutive year AED 400,000
ESR Advisory
The onshore, free zone, and financial free zone companies in the UAE are required to demonstrate adequate economic substance in the relevant activities they carry out in the UAE. The companies need to notify and submit an annual report to the regulatory authority ensuring that the UAE Economic Substance Test requirements are met. However, since it’s a new regulation the companies may fail to comply with the standards and may provide inaccurate or incomplete information that may attract heavy penalties.
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