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New UAE Economic Substance Regulations and Requirements

Economic Substance Regulations in UAE - ESR Notification

The UAE’s commitment towards being a member of the OECD Inclusive Framework and in response to a valuation of the tax framework of the UAE by the European Union (“EU”) Code of Conduct Group on Business Taxation, UAE released the Cabinet of Ministers Resolution No. 31/2019 with effect from 30th April 2019, regarding the Economic Substance(ES) Regulations in the UAE. The guidance that provides further clarity on the application of the Regulations was issued on 11 September 2019 which requires companies to have substantial activities in a jurisdiction, taking into account the global standards developed by the OECD and the EU for business taxation. Hence, all the businesses in UAE that subject to these kinds of regulations must be set to take necessary action and confirm compliance.

The regulations for Economic Substance in UAE apply to all licensee such as natural & juridical persons who performing the related activities in the UAE together with the licensee in the Financial free zone and Free Zone. In other words, The Regulations applies to all onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to keep an acceptable “economic presence” in the UAE comparative to the actions they take on. 

1. 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

2. Business Exempted from ESR 

Now the commercial companies which have any level of direct or indirect government (state and/or federal) ownership are out of the scope of the Regulations. The requirements of the Regulations will not apply to Companies in which the UAE Federal Government or any governmental authority or body or the Government of any Emirate of the UAE, or any of them has at least 51% indirect or direct ownership in their share capital. 

3. Economic Substance Test

To satisfy the economic substance requirements with a Relevant Activity, a Relevant Entity must comply with: 

• Direct the appropriate “core income-generating activities” in the UAE

• Remain “focused & managed” in the UAE; &

• Regarding the level of activities performed in the UAE:

     - Have a sufficient number of qualified full-time employees in the UAE

     - Get the proper amount of operating outflow in the UAE 

     - Have the right physical assets in the UAE. 

It should be noted that Licenses carrying out a holding company business or a high-risk IP business are subject to different economic substance test requirements. Likewise, CIGAs differ for each of the Relevant Activities, & a non-exhaustive list is comprised in Cabinet Resolution No. 31/2019.

4. First reportable Financial Year

The Regulations put on to financial years early on or after 1st January 2019. Declarations must be submitted within 12 months from the end of the relevant financial year. 

Example:

• A company in UAE with January 1st, 2019 – 31st December 2019 financial year: First assessable period would be January 1st, 2019 – 31st December 2019. 

• A Company in UAE with 1st April 2019 – 31st March 2020 financial year: First assessable period would be 1st April 2019 – 31st March 2020. No need to comply with the Regulations for the period 1st January 2019 – 31st March 2019.

5. Penalty for Non- Compliance

Non-compliance with the Regulations may lead to administrative penalties (not less than AED 10,000 but not above AED 50,000 in the first year, increased to an amount not less than AED 50,000 but not above AED 300,000 in the following year), subject to a 6-year limitation period. Other penalties like suspending, canceling, or not restarting the UAE Relevant Entity’s trade license could also apply.

6. Economic substance regulations reporting defined for mainland companies in the UAE

All the mainland companies that fall under the economic substance regulations in UAE need to notify their respective competent authorities that they undertake a Relevant Activity and the notifications need to be filed in the prescribed manner.

All the licensees of the mainland companies that are not exempt and undertake a Relevant Activity which they earn income from during a relevant Financial Year are required to meet the economic substance requirements. A Relevant Entity in the mainland will be required to report certain information on its Relevant Activities on an annual basis to the relevant regulatory authority. 

Existing entities in the mainland refer to an entity with an existing trade license in the UAE on the effective date of the Regulations, being 30 April 2019. It must comply with the regulations from 30 April 2019, with the first return due in 2020 

New entities in the mainland refer to an entity that receives a trade license on or after the effective date of the Regulations, being 30 April 2019. It must comply with the Regulations upon receiving its trade license, with the first return due in 2020.

HOW ARC ASSOCIATES CAN HELP YOU TO COMPLY WITH ECONOMIC SUBSTANCE REGULATIONS IN UAE (ESR)?

ARC Associates act as an Economic Substance Regulations consultant in Dubai, Abu Dhabi, Sharjah, and all over in UAE and can assist the mainland companies in the evaluation of relevant activities performed in the year and also in the evaluation of the total income generated from each of the relevant activities in the UAE to comply with the mainland Economic Substance Regulations in UAE.

If you are concerned that the Regulations may apply to you and are unsure about it and the next steps you should be taking, we would be happy to assist you for assessment on ESR in the following way: 

-> Identify whether your business is within the scope of the regulations.

-> If within the scope of the Regulations & to assess the current compliance level of the company as per the ESR 

-> To review the transactions of the company & identify the non-compliant elements if the criteria of Regulations are not met.

-> Suggestions to correct the weaknesses to pass the Economic Substance Test.

-> Submission of reports Assistance in the submission of the notification information & ESR report with the Regulatory Authority.

ARC Associates being an Economic Substance Regulations Consultant in the UAE will also assist the mainland companies in filing the notification to the relevant authority and also to submit the ESR returns on time to avoid the penalties. New entities can also take advice from ARC Associates so that the organizational structure could be reviewed as per the ESR policies and rules and proper changes in the structure could be made to comply with all the Economic Substance Regulations defined for the mainland companies in the UAE.


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