The deadline for the annual Economic Substance notification filings for financial year 31 December 2020, is no later than 30 June 2021.
These are annual filings under the UAE Economic Substance Regulations (Regulations) enacted through Cabinet Resolution No. 31 on 30 April 2019, as amended by Cabinet Decision No. 57 and Ministerial Decision No 100 of 2020 in September 2020, that requires all business to include, companies, branches, partnerships or other legal entities incorporated in the UAE (Licensees) to file an Economic Substance Notification (ES Notification) and if they undertake one or more specifically defined activities (Relevant Activity), as defined below, to file an Economic Substance Report (ES Report), electronically to the Ministry of Finance Portal. The Federal Tax Authority, appointed as the National Assessing Authority, will determine if the Licensees are compliant and whether penalties apply. Fines are significant for failure to comply at AED20,000 per filing in respect of ES Notifications and AED50,000 per filing in respect of ES Reports.
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 apply to all UAE jurisdictions (free zone or mainland) and require all Licensees that carry out and receive income from a Relevant Activity to demonstrate compliance with the Economic Substance Test. These Licensees are considered to be “in scope” of the Regulations.
Licensees that are directly or indirectly, at least 51%, owned by UAE Government, or a UAE Government Body or Authority are exempt. Exempt Licenses are still required to file the ES Notification.
The Relevant Activities are as follows:
- Banking business
- Insurance business
- Investment fund management business
- Lease-finance business
- Headquarter business (HQ)*
- Shipping business
- Holding company business*
- Intellectual property business (IP)*
- 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 is within the scope. Therefore, if the actual nature of the business activities carried out by the Licensee fall within one of the above categories then the Licensee will be deemed to be in scope if it does not list the Relevant Activity on it’s license, and must therefore, comply with Economic Substance Test under the Regulations.
What is the Economic Substance Test?
If a Licensee earns income from a Relevant Activity (whether income is derived from inside or outside the UAE), the Licensee 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
Which Financial Periods?
The deadline for filing for financial years commencing on or after 1 January 2019 and ending on or before 30 June 2020 was extended to 31 January 2020 to support business that have been impacted by the Covid-19 pandemic. If Licensees have not filed ES Notifications and if applicable, ES Reports for financial years for this period, then you must take urgent corrective action, as the Federal Tax Authority has been known to levy fines for non-compliance.
An annual ES Notification must be submitted by all Licensees (including exempt Licensees) within six months from the end of the relevant financial period. For Licensees that undertake and earn income from a Relevant Activity, they must file an ES report within 12 months from the end of the relevant financial period.
The deadline for financial years ending 31 December 2020 is to file no later than 30 June 2021.
Please note that failure to comply may result in financial penalties, suspension, revocation, non-renewal or strike off of the License
There are a number of actions that you are required to undertake to ensure your organisation complies with the Regulations.
- assess your business to identify if it carries on a Relevant Activity, and prepare your ES Notification
- If your business carries on a Relevant Activity and is in scope of the Regulations, prepare the ES Report
- Should you require assistance with the preparation and/or filing of ES Notifications, self-assessment and/or meeting the requirements, preparation and submission of the ES Report, then let us know.
How Can We Help?
As a licensed and experienced provider of corporate services, we, through our trusted network, can assist with the preparation and submission of your ES Notification as well as completing the assessment for compliance with the Economic Substance Test and thereafter preparation and submission of the ES Report.
If you require any further information, please do not hesitate to contact us on:
For more information or if you have any queries related to this update please do not hesitate to 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.