ECONOMIC SUBSTANCE REQUIREMENTS (ESR)

On 30th April 2019, the United Arab Emirates (UAE) issued the Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations in the UAE (the “New Law”). The New Law requires certain companies, including those incorporated in the UAE Mainland or Free Zones (the “licensees” or the “companies”), to demonstrate that they have effective substance in the country by satisfying an “Economic Substance Test” in relation to any income-generating “relevant activity”.

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​

Criteria governed under Economic Substance Test:

The Economic Substance Test requires a Licensee to demonstrate that:

  • The Licensee and Relevant Activity are being directed and managed in the UAE;
  • The relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE;
  • All or any part of the company’s gross income in relation to a Relevant activity is subject to tax in a jurisdiction outside of the UAE and
  • The Licensee has adequate employees, premises and expenditure in the UAE.

Reporting period:

The Regulations shall apply to the financial years starting on or after 1st January, 2020.

Filing Requirements:

1. Filing of notification 31st March, 2020
2. Filing of return Within 12 months from the end of their financial year

 

Exemption:

Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE Government body or authority, are exempt from the Regulations.

Penalties:

If the company registered in the UAE does not provide required information or submit inaccurate information to the regulatory authority knowing that it is inaccurate, it will be sanctioned by:

  • An administrative fine not less than AED 10,000 but not exceeding AED 50,000 in the first year;
  • Increased to an amount not less than AED 100,000 but not exceeding AED 300,000 in the subsequent year;
  • And ultimately, de-registration in case of continuous non-compliance.

Besides the fines, the Law stipulates that the tax authorities may exchange information on the non-compliant of UAE registered companies with the tax authorities in the State where their holding companies and UBOs are resident. Further, Trade / Commercial License could be: suspended, withdrawn or not renewed.

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