WHAT UAE ENTITIES NEED TO KNOW ABOUT THE ECONOMIC SUBSTANCE REGULATIONS

ESR in Dubai, Abu Dhabi and the UAE require all companies and certain other business forms (licensees) that carry out relevant activities to maintain and demonstrate an adequate economic presence in the UAE relative to the activities they undertake (an economic substance test).

When the Ministry of Finance (MoF) amended the ESR in August 2020, they made some changes to the legislation, particularly definitions and exemptions. The amended ESR also changed the national assessing authority to the Federal Tax Authority (FTA), whereas previously it had been the relevant regulatory authority. The FTA will be responsible for assessing and enforcing the compliance of UAE entities with the economic substance test.

The notification and report templates can be found on the MoF website. Licensees that earn income and fall under the definition of the exempted licensee (e.g., if a licensee is a branch of a foreign entity and its income is subject to tax in a foreign jurisdiction) are still required to file a notification but are not required to file a report.

There are other exemptions. The MoF has issued amended guidance (Ministerial Decision No. 100 of 2020), which can help firms to determine whether they conduct a relevant activity and/or if they are an exempted licensee.

The filing deadline for notifications and reports on the MoF Portal for businesses with a financial year ended 31 December 2022 is 30 June 2023 and 31 December 2023 respectively. Failure to submit a notification and report before the deadline will result in penalties of AED 20,000 and AED 50,000 respectively.

Further information on the ESR can be found on the MoF’s economic substance regulations page.

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EVERYTHING YOU NEED TO KNOW – ECONOMIC SUBSTANCE NOTIFICATION & REPORTING 2022

Action needed: –

UAE businesses are strongly advised to carry out an economic substance impact assessment as the deadline to submit the notification is fast approaching.
Lodge a notification on or before 30 June 2023 to the MoF to state if your business performs a Relevant Activity.
Final requirement for ESR that is important is the deadline of 31 December 2023 to submit your Economic Substance Report.

ESR Notification template – as well as the information relating to the financial year, the relevant activity and income, the Economic Notification will require all licensees and exempted licensees to:

Register the Ultimate Beneficial Owner (UBO) details.
Disclose a branch office’s details (if a relevant activity is conducted by a branch).
Self-certification of the exempt status for exempted licensees.

ESR Report template – this template will need to be prepared in advance and licensees are to produce:

Financial details and statements.
Evidence of Core Income Generating Activity (CIGA) details.
UBO, managed and directed information as well as proof of suitable local employees and assets.

ECONOMIC SUBSTANCE – FAILURE TO COMPLY

Penalties may be applied for non-compliance or incomplete reporting; fines are ranging from AED 20,000 to AED 400,000. Many businesses have already failed to meet the economic substance test and failed to demonstrate sufficient economic substance in their first (2019) and second reporting period and could be subject to a penalty of AED 50,000 for the first year and AED 400,000 for each subsequent fiscal year. Licensees with a December year end only have until 31 December 2023 to ensure that they meet the economic substance test.

Furthermore, failure to comply with the Economic Substance regime for the year ended 31 December 2022 will have severe results such as suspending or cancellation of your business license.

ECONOMIC SUBSTANCE – NEXT STEPS FOR YOUR COMPANY

Business owners only have till the end of June to get their UAE company in order, complete the requirements, identify any gaps, review compliance processes, and correct any errors. Below we have drafted the next steps to ensure your business meets the requirements and standards on time.

Arrange your ESR consultation with a registered corporate service provider.
UAE entities (licensees) carrying out a relevant activity are required to submit their Economic Substance Notification via the MoF by 30 June 2023.
Start working/seeking the help of experts to work on your Economic Substance Report.
If you have already completed your Economic Substance Report, have an expert review, and ensure all is in order and to meet standards.
Licensee must file their Economic Substance Report for the year ended 31 December 2021 by 31 December 2023.

ECONOMIC SUBSTANCE – HOW CAN CREATION BUSINESS CONSULTANTS HELP?

As a leading registered corporate service provider with a robust corporate structuring, compliance, and tax department team of experts, we can guide you through the complete Economic Substance formalities to assist with:

Review of ESR compliance and identify any gaps.
Amend and work on corrections.
Outsource activities or roles to meet reporting standards.
Notification and report preparation, filing and submission.

If you are not an existing Creation client and need assistance with ESR filings, we would be happy to assist your business to assess your obligations under the ESR, and to understand if you meet the Economic Substance tests. Our dedicated corporate structuring and tax experts have a wealth of knowledge on the ESR and have assisted many clients with their ESR obligations.

Should you require assistance to complete your Economic Substance Return, reserve your free consultation with our tax & compliance experts via email [email protected] or call +971 4 878 6240.