Understanding the Economic Substance Regulations

Subsequent to the consultations with European Union and Organization for Economic Co-operation and Development OECD, the Cabinet of Ministers of UAE updated the 2019 Cabinet Decision No. 31, pertaining to the Economic Substance regulations (ESR). The upended regulations were announced by the Cabinet Resolution No. 57 in August 2020. Additionally, the Ministerial Decision No. 100 was released that gave supplementary information on the implemented Relevant Activities Guide.

As per the laws mentioned under Economic Substance Regulations, it will be applicable in retrospect from January 2019 on al licensees in UAE. Thus, all licensees will need to re-evaluate their ESR categories and make the relevant changes as per the newly amended laws and regulations. It will require all licensees to again file the FY 2019 notifications at the Ministry of Finance portal, while the ESR reports will be required to be uploaded within 12 months. The portal will be live in December 2020.

Key Amendments

As per the amendments done in August 2020 in the Economic Substance Regulations, here is a quick purview:

Role of FTA and RA: UAE Federal Tax Authority (FTA) is now the National Assessing Authority and will oversee the enforcement of economic substance tests. While the Regulatory Authorities shall be responsible for collection and checks on the authenticity of reports and notifications submitted by the license holders.

Amendment of the term Licensee: It now stands for unincorporated partnerships, juridical individuals that carry on with relevant activities that is companies established in the Free Zones- Abu Dhabi Global Market and the Dubai International Financial Centre. Those that are no longer under the ESR include sole proprietors, foundations and trusts.

Exemptions to Licensees: In the past, the ESR exemptions were granted to companies/entities with 51% indirect/direct government ownership has been revoked.  Now, only these licensee categories are exempted:

• UAE offices of foreign companies
• Tax residents staying away from UAE
• Investment funds
• Licensees granted exemption by Ministry of Finance (they will be required to file notifications and sufficient evidence for exemptions)
  
  

Specification on Notification

Now on, exempted licensees and licensees carrying on with relevant activity have to be done within 6 months of the FY end. While the deadline is within 12 months of the year end- December 2020.

Clarifications on ESR Test

There are no major changes to the ESR tests. However, some changes that have been included are that the directors of the licensee do not have to be UAE resident, but the Board of directors need meet in UAE based on the activity levels of the Licensee.

Economic Substance Report

The company needs to submit the ESR to the MoF while the Licensee’s FY report has to contain:

• Category of relevant activity that is conducted
• Gross income, type of operational costs and assets in UAE
• Place and location of business
• Details of full-time employees in UAE
• Financial statements
• Declaration if or not the Licensee adheres to the Economic Substance Test

Companies that need to comply with the ESR

All of the businesses and companies that are registered in the UAE doing relevant activity need to comply with the provisions of the ESR. These include:

• Banking and Insurance
• Distribution and Service Centers​
• Finance – Lease Business
• Investment Fund management companies
• Holding Company Business 
• Shipping companies
• Intellectual property Business
  
  

Penalties

There has been an increase in the penalties. In the first year, failure to submit report or the requirements of the ESR is AED 50,000. In the second year, it is AED 400,000. If the Licensee fails to submit notifications, the levy is AED 20,000. If there is continuous non-compliance, the license will be revoked.

Thus, the new regulations will ensure that the Licensees will undertake the required measures to adhere to the current Economic Substance Regulations to streamline and fall within the purview of the government required compliances.