Economic Substance Regulations in UAE - N R Doshi & Partners

The objective of ESR UAE

The main purpose of the ESR UAE is to protect the reputation of the State and whose entities that operate within UAE- whether onshore, Free Zone or offshore by ensuring that income generated from Relevant Activity has economic substance and give a base to support that the incorporation in the UAE was not motivated to benefit from the privileged tax regime.

Entities subject to ESR

Companies that are registered and established in UAE Freezone company setup or in a Financial Free Zone that carry out the Relevant Activities.

What are the Economic Substance Regulations/ Test?

The Economic Substance Regulations is established on the three crucial pillars that a Licensee/Company must fulfill the criteria as under, to meet the Economic Substance Regulations/Test in relation to any Relevant Activity.

1. Core Income Generating Activity (“CIGA”) associated with the activities covered by the ESR should be undertaken in the UAE;
2. Licensee/Company should be directed and controlled from the UAE;
3. The Licensee’s activities must be carried out with adequate local “Economic Substance” with regard to the level of relevant activity in the UAE. The Economic substance consists of:
   • Full-time employees
   • Expenditure
   • Premises

Explaining Core Income Generating Activity (CIGA)

Article 5 of the Cabinet Ministers Resolution No. 31 defines State Core Income-Generating Activities means activities that must be conducted by a Licensee in the State (UAE) and shall include:

EXEMPTED ENTITIES FROM ESR

Licensees that are directly or indirectly owned at least 51% by the Federal or Emirate Government or a UAE Governmental Authority or body.

NOTIFICATION AND FILING OF RETURNS

Companies who meet ES Test are required to notify as well as file Economic Substance Return within 12 months from the end of the relevant financial period.

TIMELINES FOR NOTIFICATION FILING

Ministry of Economy, which regulates the mainland companies who are issued licenses by the Department of Economic Development, has extended the notification filing date to 30 June 2020. The deadline for filing Economic Substance Return for the Financial Year 2019 remains unchanged. The relevant notification may be found here.

Notifications and Return/ Report Filing

Companies who meet the ESR UAE Test are required to notify the Regulatory Authority (onshore, Free Zone, offshore) as well as file Economic Substance Return within 12 months from the end of the relevant financial period.

Offenses and Penalties

An entity that commits the offense will be liable to an administrative penalty of between AED 10,000 and AED 50,000 if it either

• fails to provide the required information or
• knowingly provides inaccurate information.

A stricter penalty would be applied for failure to meet the Economic Substance Test. This increases to between AED 50,000 and AED 300,000 in the subsequent year(s).
Failure to comply may result in stricter actions from the Authorities including suspension or strike off, VAT deregistration in UAE, suspending, revoke or denying renewal of a company’s license.
The Ministry of Finance also has the authority to report any non-compliance to a company’s foreign regulators, subject to the provision in international agreements (e.g. double tax treaties), which could attract strong and unwanted scrutiny.

Maintenance of Records

Records will have to be maintained for a period of 6 years. In case the authorities find that there is any deliberate misrepresentation or negligent or fraudulent intention then a time bar period of 6 years won’t apply.