The Economic Substance Regulations require onshore and free zone companies in the UAE and certain other business forms that conduct any of the relevant activities to maintain and demonstrate “Economic Presence” in the UAE relative to the activities they undertake.
The primary purpose of the economic substance regulations has been to ensure that certain legal entities established in those countries with low or no corporate taxation such as the UAE, demonstrate that they are engaged in economic activities which meet or exceed an economic substance threshold. The Economic Substance Regulations serve as a means to eliminate financial crime as well. The purpose of the Economic Substance Report is also to provide the National Assessing Authority with information on the Licensee and the income, expenditure, assets, employees, and governance of the entities dealing in the below-mentioned Relevant Activities.
· Banking Business
· Insurance Business
· Investment Fund management Business
· Lease - Finance Business
· Headquarters Business
· Shipping Business
· Holding Company Business
· Intellectual property Business
· Distribution and Service Centre Business
For each financial period in which a Licensee earns income from a Relevant Activity, it will need to meet an Economic Substance Test in relation to that Relevant Activity. Generally, a Licensee must i) conduct the relevant core income-generating activities in the UAE and ii) be ‘directed and managed’ in the UAE.
Corporate Entities or a partnership that is not an Exempted Licensee and that derives Relevant Income from any of the above mentioned relevant activities should submit an Economic substance Report.
The Regulations apply to financial years starting on or from 1 January 2019. Entities within the scope of the Regulations should submit an annual Notification form to their Regulatory Authority, and complete an Economic Substance Report and submit to the same Regulatory Authority within 12 months from the end of their financial year.
Entities that undertake a relevant activity will need to submit an annual notification through the Ministry of Finance portal. All Notifications must be submitted within six months from the end of the Financial Year. Licensees that already submitted a Notification directly to their Regulatory Authorities are required to re-submit this Notification on the Ministry of Finance Portal. Entities that undertake a Relevant Activity and earn income from the Relevant Activity will also need to file an annual economic substance return, self-assessing whether they met the economic substance requirements, supported by additional information.
If an entity has not earned income from one of the relevant activities mentioned above in any Financial Year, or if it meets the conditions for being exempt, then it is not required to meet the Economic Substance Test or file an Economic Substance Report. Irrespective of which a Notification form will have to be submitted. Failure to comply with the Regulations may result in penalties and other administrative sanctions such as the suspension, revocation of trade license or permit.
Support from Vertex Compliance
Vertex Compliance will share trackers to assess if there have to be any filings under ESR
Each entity must assess whether it is a Licensee and carries out a Relevant Activity as follows:
The relevant Legal Department will first determine if the entity is a Licensee based on the classification set out in the questionnaire and complete the tracker and forward it to the CFO.
The CFO after the review of the tracker and, if the entity is a Licensee,
• The CFO should verify that the list entities that they oversee is complete and, if not, notify the Legal Department;
• If the entity is not a Licensee, confirm they have no further comments to the Legal Department; or
• If the entity is a Licensee, the CFO will need to assess whether the Licensee undertakes any Relevant Activities.
Once done, the CFO must send the completed trackers back to the relevant Legal Department. Vertex Compliance will then review the trackers.
Once Vertex Compliance has reviewed the completed trackers, the CFO will be notified as to whether any filings under the Economic Substance Regulations are required and arrange additional consultation for filing ESR with the Ministry of Finance.
Non-compliance with the obligation to file an ESR before the deadline is subject to a penalty of AED 50,000, and can result in the Licensee being revoked. Providing incorrect or false information in the Economic Substance Report or incorrectly claiming an exemption is also subject to a penalty of AED 50,000.