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Economic Substance Regulations

The Economic Substance Regulations (ESR) were introduced in the UAE on 30 April 2019 pursuant to the Cabinet of Ministers Resolution No.31 of 2019 (“Regulations”). Following this, guidance on the application of these regulations was also introduced as per the Ministerial Decision No. 215 of 2019. As per the regulations, the UAE-based businesses that carry out the relevant activities listed in the guidance are required to demonstrate adequate economic presence by meeting the UAE economic substance test.  The regulations mandate that the companies need to notify and submit an annual UAE economic substance report to the regulatory authorities if they are carrying out the relevant activities.

Economic

Substance Regulations

The companies in the UAE that carry out the relevant activities need to notify the regulatory authority on an annual basis. They need to report the followings:-

  • Whether they are carrying out a relevant activity in the UAE
  • Whether any income is subject to tax outside the UAE
  • The date of the financial year

The companies need to submit an annual report to the Regulatory Authority every year to demonstrate if they are carrying out the relevant activity. It is mandatory to provide details of the activity, income, expenses, and assets that declare whether the UAE economic substance test is fulfilled. The companies need to submit the report to the Authority within 12 months of the end of each financial year.

The following are some of the major actions the companies need to undertake before the end of a financial period:

  • Assessment of the Relevant Activities carried out during the financial period using substance over form approach
  • Assessment of the amount and type of income generated from the Relevant Activity during the financial period
  • Hold Board Meetings with the directors who are physically present in the UAE
  • Sign and maintain the board meeting minutes in the UAE
  • Determine the amount and type of expenses and the UAE-based assets related to the 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​

The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority , and complete and submit to the same Regulatory Authority an Economic Substance Report within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the Economic Substance Test and file an Economic Substance 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. A Notification form will need to be submitted regardless. Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), as well as other administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.

  • The companies need to ensure that access to assets can be proved through agreements & financial records
  • The companies need to determine the number of full-time employees (UAE-based) in charge of the Relevant Activities
  • Demonstrate control and supervision of any outsourcing arrangements

Economic Substance reporting regulations apply to the UAE businesses that carry out the following 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​

Business registered in the UAE can use the substance over form method to determine whether they undertake a relevant activity or not. This means the companies need to assess not only the activities associated with their commercial license or registration certificate but also the activities carried out during a financial period.

As per the regulations on Economic Substance Test Reporting in Dubai, UAE, the companies need not actively carry out the relevant activities. The regulations also allow consolidating the ancillary activities under the main Relevant activity which would ensure that no duplicate reporting takes place.

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