Overview of UAE Economic Substance Regulation Requirements.
Companies in the UAE are required to conduct an annual self-assessment to determine the applicability of Economic Substance Regulations (ESR). The time for assessment has neared as the UAE entities are required to file their ESR notifications on or before June 30, 2022, for the financial year ended on December 31, 2021. For a licensee whose financial year ended on June 30, 2021, the deadline to file a Report is 30 June 2022.
The notification and/or the economic substance report is required to be filed on the Ministry of Finance’s portal.
Is your Company ready for Economic Substance Notification & Reporting?
ESR REPORTING OBLIGATIONS OF UAE ENTITIES
UAE entities that conduct any one or more of the Relevant Activities must file a notification within six months of the end of the financial year (FY) on the Ministry of Finance’s (MoF) online ESR portal.
As per Article 8 of the Cabinet Decision, Every Licensee and Exempted Licensee are required to include the following information in the Economic Substance Notification
- Relevant Activity carried out in the given Financial Year.
- A statement of whether the company has earned any Relevant Income during the given Financial Year.
- Date of commencement and end of Financial Year.
- Any information/ document demanded by the Regulatory Authority.
- Documents to substantiate exempted status of exempted licensees.
- In the case of a UAE entity with multiple UAE branches, only one consolidated notification is to be submitted.
Entities that have earned income from any Relevant Activity(ies) must file a report on the MoF’s online ESR portal within the twelve (12) months of the end of the relevant FY. As part of this filing, entities are required to disclose various details, including:
- Whether or not they have met the ES Tests.
- Details of outsourced service provider(s) (if applicable).
- Details of specific CIGAs conducted.
- Operating expenditure and number of full-time employees for each Relevant Activity.
- Details of parent, ultimate parent, and ultimate beneficial owner.
Economic Substance Test
The Economic Substance Test in the UAE requires Licensees to demonstrate the following:
a). The Licensee is being directed and managed in the UAE
b). The Licensee conducts the relevant Core Income Generating Activities (CIGAs) in the UAE
c). Licensee has an adequate number of employees and an adequate number of physical assets and expenditure in the UAE
SCOPE AND APPLICABILITY
ESR applies to all private/public shareholding companies, joint venture companies, partnership firms, etc. The Regulation does not cover individuals, sole proprietorship, trust, or a foundation under its ambit.
The Cabinet Decision No 57 of 2020 categorises the entities that fall within the ESR as Licensees and Exempted Licensees. Both Exempted Licensees, as well as Licensees, are required to file the ESR Notification. However, Exempted Licensees need not submit an ESR Report or meet the Economic Substance Test.
The following categories of Licensee are exempt from the Regulation:
- Investment Fund.
- A company that is a tax resident of a country outside the UAE.
- A Licensee who is completely domiciled in the UAE (not part of an MNE group and no cross border activities).
- Branch of a foreign entity that is taxed outside the UAE.
However, the exemption to the above categories will be applicable only upon submitting evidence to fulfill the conditions prescribed for exemption.
Applicability to Branch
The Regulation has clarified that the UAE branch of a UAE entity is merely an extension of ‘parent’ or ‘head office’ and, therefore, not considered as a separate entity for this Regulation.
Applicability of ESR compliance to Branches are as below:
- Foreign branch of UAE entity – UAE entity is not required to consolidate activities/income of foreign branch for ESR provided that the income of such branch is subject to tax outside the UAE. In this context, the branch includes a Permanent Establishment or any other form of taxable presence for corporate income tax purposes.
- UAE branch of a foreign entity – An entity is required to comply with Regulation unless the Relevant Income of such branch is subject to tax outside UAE.
Entities that conduct one or more of the stated activities will be subject to ESR:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Headquarter Business
- Distribution and Service Centre Business
CONSEQUENCES FOR NON-COMPLIANCE
- Failure to comply would result in following administrative penalties:
- Failure to file notification – AED 20,000
- Providing inaccurate information – AED 50,000
- Failure to submit substance report – AED 50,000
- Failure to fulfil economic substance test – AED 50,000
If failure continues in the second consecutive year, the amount of penalty is increased to an amount of AED 400,000 in the subsequent year.
- The Regulatory authorities may also impose other penalties which include but are not limited to suspension, revocation, or non-renewal of a Licensee’s license.
CARRY OUT A SELF-ASSESSMENT
Most of the non-compliant entities attract penalties due to a lack of knowledge of the ESR legislation and requirements. Lack of proper understanding about the Relevant Activities or misconceptions about the definition of an Exempted Licensee / Licensee are strong reasons why many companies become non-compliant. Missing the ESR deadline is also a common mistake committed by the companies.
- UAE businesses are strongly advised to carry out an economic substance impact assessment as the deadline to submit the notification and report is fast approaching.
- Assess whether business has conducted relevant activity.
- Lodge a notification on or before 30 June 2022 ESR notifications on or before June 30, 2022, for the financial year ended on December 31, 2021 to the MoF if your business performs a Relevant Activity.
- File Report whose financial year ended on June 30, 2021, the deadline to file a Report is 30 June 2022.
ESR COMPLIANCE SERVICES
Ahmad Alagbari Chartered Accountants experts can help you by providing following services
- ESR Test / Assessment
- Review of ESR compliance and identify any gaps
- Timely submission of Notification
- Submission of ESR Report
Alia Noor (FCMA, CIMA, MBA, GCC VAT Comp Dip, Oxford fintech programme, COSO Framework)Associate Partner
Ahmad Alagbari Chartered Accountants