UAE Economic Substance Regulation – Compliance and Filing Obligations

Economic Substance Regulation has been issued in the UAE since April 2019. Since its introduction, there have been various updates and amendments to the rule.

IMC Group has deeply studied and analysed the upcoming Economic Substance Regulation in order to guide businesses through the ESR filing obligations and help them prepare for the same.

Applicability of Economic Substance Regulation

 The Economic Substance Regulations broadly apply to all United Arab Emirates onshore as well as free zone legal entities that carry out one or more of the 9 ESR “Relevant Activities” referred to as “licensees”.

The “Relevant Activities” are as follows:

• Banking
• Distribution and service centre
• Fund management
• Headquarters
• Holding company
• Insurance
• Intellectual property
• Finance and leasing
• Shipping

ESR Filing Requirements

The entities that fall within the scope of the regulations are required to submit a notification form and an Economic Substance Report to the respective regulatory authority.

The annual filing obligations for such entities are as follows:

• Notification

A notification must be filed within 6 months from the end of the financial year declaring that the entity undertakes Relevant Activity, even if no income was earned from such activity during the financial year; and

• Report

In case of income earned from Relevant Activity, a report must be filed within 12 months from the end of the financial year declaring certain business information demonstrating economic substance. The information includes income figures, expenses, assets, number of employees, etc.

Note:

An entity is not required to file the report for any financial period in which it has not earned income from a relevant activity or if it meets the conditions for being exempt. However, a notification must be filled regardless. 

Exemption from the Regulation

The following entities are specifically exempted from the regulations:

• Investment funds
• UAE branches of a foreign entity provided the branch’s income is taxed in a foreign jurisdiction
• Tax resident entities in a foreign jurisdiction
• Wholly-owned entities by UAE residents or nationals that are not part of a multinational group, if they carry on business in the UAE.

Reporting Deadlines

Below are the reporting deadlines for a selection of financial year ends:

Key Actions

On the completion of a given financial year, entities are required to determine their upcoming ESR filing obligations and take the necessary steps to ensure timely filing along with submitting the supporting documentation.

Penalty for Non-Compliance

In case of non-compliance, entities will have to bear wide-ranging and significant penalties which are as follows:

• AED 20,000 – For failure to submit a notification
• AED 50,000 – For failure to submit an Economic Substance report
• AED 50,000 – For failure to provide accurate or complete information
• AED 50,000 (first failure) and AED 400,000 (second failure) – For failure to demonstrate sufficient economic substance in the UAE

Key ESR Considerations

Before the end of the financial year, all UAE entities must consider the following ESR matters and ensure timely action, where relevant.

• Assess whether the entity has conducted any Relevant Activity during the period and has generated income from the same. This is a crucial assessment as it determines its specific UAE ESR compliance requirements for that financial year.
• Entities that are earning income from any Relevant Activity during the period need to review their compliance with the applicable ESR tests (Directed and Managed, Core Income Generating and Adequate).
• Post review, entities should address the potential areas of non-compliance, if any.
• In case where the entity’s ability to comply with the regulations got impacted due to COVID-19, it should look for temporary measures such as appointing alternate directors in the UAE to attend local meetings.
• Entities should ensure control and supervision over any outsourcing arrangements. This can be done by way of entering into contractual agreements or correspondence.

The above-mentioned guideline provides an opportunity for the entities to take the necessary actions to comply with the ESR within the stipulated timelines.

How can IMC Group help?

IMC Group can help you navigate through the Economic Substance Regulation and guidelines based on your jurisdiction. You may book a consultation with our expert to know how the new update will affect you and the way forward.