Since Economic Substance Regulations (ESR) were put in place a number of updates were issued by the Regulatory Authorities on the filing method and deadlines for submitting each respective ESR notifications. Below is a summary of the regulations, what it means for your company and the necessary steps you need to take before filing.
Guidance was issued by the UAE Ministry of Finance regarding the implications of UAE Economic Substance Regulations (Regulations) that came into effect in 2019. The Regulations apply to financial years starting on or after 01 January 2019 and stipulate that relevant entities defined as all companies, branches, partnerships or other legal entities incorporated in the UAE (Licenses) that undertake one or more specifically defined activities (“Relevant Activity”) need to submit a notification with its Regulatory Authority, as well as possibly take an Economic Substance Test.
The objective of the Regulations is to demonstrate that the economic activity of the business licenses incorporated in the UAE is actually situated within the UAE and that the purpose of incorporating the business license is not driven solely by the tax regime.
The Regulations require all UAE Licenses, whether onshore, offshore or free zone, that carry out and receive income from a Relevant Activity to demonstrate compliance with the Economic Substance Test. These Licenses are considered to be “in scope”. Licensees that are directly or indirectly at least 51% owned by UAE Government, or a UAE Government Body or Authority are exempt.
The Relevant Activities are as follows:
- Banking business
- Insurance business
- Investment fund management business
- Lease-finance business
- Headquarter business*
- Shipping business
- Holding company business*
- Intellectual property business*
- Distribution and service center business*
* There is a lower substance threshold for a holding company business. For HQ, IP or distribution and service center business, further conditions apply including but not limited to, transacting with foreign group companies.
The UAE Authorities require a “substance over form” approach to be taken when determining whether a Licensee undertakes a relevant activity and is within the scope of the Regulations. This means that even if the License does not explicitly list one of the above Relevant Activities, if the actual nature of the business activities carried out by the Licensee fall within one of the above categories then the License will be deemed to be in scope and must comply with an Economic Substance Test under the Regulations.
What is the Economic Substance Test?
If a License earns income from a Relevant Activity (whether income is derived from inside or outside the UAE), the License must demonstrate that is satisfies all of the following conditions:
- Licensee and Relevant Activity are directed and managed in UAE
- Relevant Core Income Generating Activities (CIGAs) conducted in UAE
- Licensee has adequate employees, premises and expenditure in UAE
What financial periods does this apply to?
The Regulations apply to financial years commencing 01 January 2019. Licensees that undertake and earn income from a Relevant Activity (and for some Authorities regardless of whether a Relevant Activity is undertaken) are required to file an economic substance return within 12 months from the end of the relevant financial period.
What does this actually mean for my business?
There are a number of actions that you are required to undertake to ensure your organisation complies with the Regulations.
- assess your business and assess every License that your business maintains in the UAE to identify if it carries out a Relevant Activity and is therefore in scope of the Regulations (some Authorities require for you to file regardless of whether the entity conducts a Relevant Activity)
- prepare your declaration filings for each License and identify the applicable regulatory authority
- understand that if you fall within scope of the Regulations then you may need to take positive action to ensure that you can comply with the substance requirements. Should you require assistance with self-assessment and/or meeting the requirements, we would be pleased to introduce to trusted providers that can help
- failure to comply may result in financial penalties, suspension, revocation, non-renewal or strike off of the License and/or spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations).
Deadlines for submitting notifications and EST compliance vary and are determined by the applicable regulatory authority. Some of the Authorities that have confirmed their deadlines are as below:
Should you be interested in learning more and understanding what your business needs to do to ensure compliance, please get in touch with us on firstname.lastname@example.org or +971 (0) 4 446 3900.
Disclaimer: All information provided in this article was correct at time of publishing. Not all Regulatory Authorities had released information on the filing deadline of the notification, at time of publishing.