UAE Economic Substance Regulations Update

UAE Ministry of Finance has released FAQs on the Economic substance regulations (“ESR”) on its website.

Please find below some of the major points:

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• Scope of the regulations – ESR Regulations apply to UAE onshore, offshore, free zone companies,branches, partnershipsand other UAE business forms (referred to as Licensees) that carry out any of the following Relevant activities:

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• Banking business

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• Insurance business

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• Investment fund management business

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• Lease finance business

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• Headquarter business

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• Shipping business

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• Holding company business

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• Intellectual Property business

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• Distribution and service centre business

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• Exemption from regulations – Entities that are directly or indirectly at least 51% owned by the Federal or an Emirate government, or a UAE government body or authority, are exempt from the regulations.

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• First reporting financial year – ESR apply to financial years starting on or after 1st January 2019

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• Who needs to notify and by when? – Licensee that undertakes a relevant activity (irrespective of whether the Licensee qualifies for an exemption under the Regulations or has earned income from the Relevant Activity during the relevant financial period) needs to submit a notification with its Regulatory Authority. Notifications for the financial period 2019 can be filed on or after 1 January 2020.

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• Who needs to file ESR return and by when? – Only Licensees that earn income from a Relevant Activity during the relevant financial period and that are not exempt from the Regulations are required to demonstrate economic substance in the UAE and file an economic substance return. Economic substance returns must be filed within 12 months from the end of the relevant financial period.

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• What is Economic substance test? – The Economic Substance Test requires a Licensee to demonstrate that: ?

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• Licensee and Relevant Activity are being directed and managed in the UAE; ?

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• Relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE; and ?

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• Licensee has adequate employees, premises and expenditure in the UAE.

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• Is relevant activity only to be considered as per Commercial license? – No, a ‘substance over form’ approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of ESR. The actual activities undertaken by the Licensee during a financial period need to be looked at.

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• Does ESR apply to income from the relevant activity earned by Licensee from outside UAE? – Yes, Income from a Relevant Activity for which the Licensee needs to demonstrate economic substance in the UAE includes all income, including income that is generated by the Licensee outside of the UAE.

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• Do employees who perform the CIGAs need to be resident in the UAE? – Non-resident employees or other persons would count towards the economic substance of a Licensee in the UAE only if (i) the relevant activities are performed while the individual is physically present in the UAE, and under the direction of the Licensee and (ii) the Licensee bears the relevant costs of the non-resident individual.

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• Do the directors of the Licensee need to be resident in the UAE? –No, directors only need to be physically present in the UAE to attend relevant board meetings of the Licensee.

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• Penalties for non-compliance

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• Failure to notify – Penalty of AED 10K to AED 50K

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• Failure to provide accurate or complete information – Penalty of AED 10K to AED 50K

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• Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year

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• First failure – Penalty of AED 10K to AED 50K; and Information exchange with foreign competent authority of 1) parent company, 2) ultimate parent company; and 3) ultimate beneficial owner

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• Second consecutive failure –Penalty of AED 100K to AED 300K; and Information exchange with foreign competent authority of 1) parent company, 2) ultimate parent company; and 3) ultimate beneficial owner; and Suspension, withdrawal or non-renewal of license

This document is only for information purposes and should not be construed as an advice. It does not necessarily cover each aspect of the topic with which it deals. You should not act upon the contents of this document without receiving formal advice on your particular circumstances.

If you would like to discuss any ESR matters, please drop us an email at info@premier-brains.com or call us at + 971 4 3542959.

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