The Economic Substance Regulations (ESR) 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 2021 is 30 June 2022 and 31 December 2022 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.