Laws regarding Economic Substance Regulations in UAE were initially issued in 2019, but in 2020 the UAE government made amendments to its ESRs and clarified to whom the regulations apply, and started centralization of the notification procedure. Businesses across the UAE must stay updated and comply with the Economic Substance Regulations or run the risk of incurring exorbitant fines. Here’s what you need to know about the Economic Substance Regulations and how they may affect your business in the UAE.
What are the Economic Substance Regulations in the UAE?
Economic Substance Regulations or ESRs were initiated globally to comply with key European and American regulatory bodies. Essentially, these regulations are directed at improving tax transparency in jurisdictions that offer minimum tax liabilities. The Economic Substance Regulations’ main objectives in the UAE are to ensure regular documenting, tracking, and reporting of economic activities carried out by all legal bodies operating in the UAE. This includes companies, branches, subsidiaries operating on the mainland, or any free zones in the UAE.
This also reiterates UAE’s commitment to the BEPS (Base Erosion and Profit Shifting) (BEPS) Action Plan put forward by the Organization for Economic Cooperation and Development or OECD.
Broadly, the ESRs in UAE are intended to comply with the following 4 minimum standards set by BEPS.
- Dealing with harmful tax practices
- Stop granting of tax treaty benefits in inacceptable circumstances
- Ensuring country-by-country reporting
- Mutual agreement procedures
Do the Economic Substance Regulations in the UAE apply to me?
The Economic Substance Regulations apply to UAE mainland and free zone companies, including branches, partnerships, and other UAE business forms that are engaged in any of the following activities:
- Banking
- Insurance
- Investment fund management
- Lease finance
- Headquarter businesses
- Shipping
- Holding company businesses
- Intellectual property businesses
- Distribution and service centre
What does it mean if my business is within the scope of the Regulations?
For each financial period during which a business earns income from one of the relevant activities, it must comply with an Economic Substance Test corresponding to that activity. The Economic Substance Test requires licensees/businesses to prove that
- Both the business and the relevant activity are being directed and conducted in the UAE
- The CIGAs or Core Income Generating Activities are being run in the UAE
- The business has sufficient employees, premises, and expenses in the UAE
Also, licensees/businesses undertaking and earning income from a relevant activity must file an ESR return in 12 months from the end of the applicable financial period.
Note: It is not mandatory for Holding Company Businesses to be directed and managed in the UAE, aside from where this is a requirement of the corresponding licensing authority.
What financial periods does the ESR in UAE apply to?
The Economic Substance Regulations in the UAE apply to financial years starting on or from January 1, 2019. Declarations are to be submitted within 12 months from the end of the relevant financial year. That is, for licensees whose financial year ends on December 31, 2020, a declaration must be made by December 31, 2021.
Does this mean that board meetings must be held in the UAE?
Yes, it does if your business needs to comply with the Economic Substance Test. An adequate number of board meetings (the number depends on the relevant activity undertaken) must be held in the UAE. Each board meeting must meet the following conditions
- A minimum number of directors must be physically present in the UAE
- Minutes of the Meeting must be documented and signed in the UAE
- Directors who attend the board meeting need to have the required skills and knowledge to perform their duties
What does Economic Substance Notification & Return Filing include?
All UAE companies, irrespective of whether they are mainland, offshore, or Free Zone companies that are licensees and perform a ‘relevant activity’ during a particular year must file a notification per the template prescribed by the relevant Licensing Authority unless otherwise mandated by the relevant Licensing Authority.
What should the Economic Substance Notification include?
- Whether or not the business is engaged in one of the relevant activities
- Description of the kind of relevant activities performed by the business and the type of income from those activities
- Whether the income earned from core income-generating activities can be taxable in any jurisdiction outside the UAE
- Whether the licensee is a tax resident anywhere other than the UAE, and if they are, where
- Whether at least 51% of the business is owned, directly or indirectly, by the Federal/an Emirate Government/UAE Government body or authority
- The first reportable financial year the business is subject to
Any business carrying out relevant activities should submit an Economic Substance Report annually to the Regulatory Authority to prove that it complies with the economic substance regulatory requirements.
What should the Economic Substance Report include?
- Amount and type of income gained from relevant activities
- Location of the relevant activities and the property and/or equipment used to perform the same
- Number of employees plus their qualifications, and the total number of people responsible for performing the activities
- Disclosure affirming that the business has met the economic substance requirements
What is the penalty for not complying with Economic Substance Regulations in UAE?
If you do not comply with the ESRs or provide incomplete/inaccurate data, your business may be charged an administrative fine ranging from AED 10,000 to 50,000 during the first financial year. If you do not comply with the subsequent fiscal, your business can be charged with an administrative fine ranging from AED 50,000 to AED 300,000. Please keep in mind that unpaid fines can even lead to Licensing Authorities suspending, revoking, or denying renewal of your business license.
How can Avyanco help with ESR compliance in the UAE?
If you have set up a business in Dubai and are unsure if the Economic Substance Regulations may apply to you and are uncertain of the steps you should be taking, Avyanco Auditing LLC can help. As one of the leading auditing firm in Dubai, Avyanco can help assess whether the Economic Substance Regulations are applicable to your business and provide preliminary assessments of your company’s current compliance obligations.
We offer end-to-end solutions for business setup in Dubai, including Tax and other Regulatory Compliance, Advisory, Audit – services. What makes us different from other business set up consultants in the UAE is that we execute our services in compliance with internationally adopted best practices.
Please reach out to us for information about company formation or regulatory compliance in the UAE mainland or free zones, please reach out to us. Call/WhatsApp: +971 50 3989000, (T):+97142405000, Email: info@avyanco.com.
