What is Economic Substance Regulations?
In April 2019 the UAE Cabinet of Ministers issued its Resolution No. 31 of 2019 about the Economic Substance Regulations or ESR. ESR is a mean to check whether companies working in UAE are fulfilling economic substance test or not.
The ESR places two requirements upon the companies. First, to submit a notification to their relevant regulatory authority. For most of the regulatory authorities the deadline to file this notification is June 30 th. Second, all companies who are engaged in any of the relevant activity are to submit a report to their respective regulatory authority about whether they have met the economic substance test. This report is to be submitted by December 31 st .
The ESR gives 9 activities to be the relevant activities for the purposes of ESR, which are:
1. Banking Business
2. Insurance Business
3. Investment Fund Management Business
4. Lease-Finance Business
5. Headquarter Business
6. Shipping Business
7. Holding Company Business
8. Intellectual Property Business
9. Distribution and Service Centre Business
Penalties for Non-Compliance with ESR?
| Failure to meet the Economic Substance Test (First Time) | Between AED 10,000 to AED 50,000 |
| Failure to meet the Economic Substance Test (Subsequent) | Between AED 50,000 to AED 300,000 |
| Failure to provide Information/Provision of Inaccurate Information | Between AED 10,000 to AED 50,000 |
There are regulatory authorities for the purposes of submission of notification and the report under the ESR. These includes Ministry of Economy, UAE Central Bank, Insurance Authority, Securities and Commodities Authority and the competent license issuing authorities in the Free Zones and the Financial Free Zones.
A company in which Federal Government, the Government of any Emirate of the UAE, any Government Authority or entity affiliaIn addition, the relevant Regulatory Authority may impose any other administrative action like suspension, revocation or non-renewal of the license of the Licensee.
Assessment, Appeal and Exchange of Information related to Economic Substance Regulations in the UAE
The Regulatory Authority will examine the annual report submitted by a licensee and can ask for further information or documents. Based upon this examination, the Regulatory Authority will determine whether the Licensee has met the Economic Substance Test.
This assessment is to be made not later than six years from the end of the financial year to which it relates. However, this six years time limitation shall not apply where the Regulatory Authority is not able to make the assessment by reason of any deliberate misrepresentation or neglect or fraudulent action by the Licensee or by any person.
In case of High Risk IP Licensee the Regulatory Authority is to determine that Economic Substance Test is not met unless the Licensees provides sufficient information to satisfy the Regulatory Authority that Economic Substance Test is met. A Licensee can appeal against the assessment or penalty imposed by the Regulatory Authority in accordance with the procedure to be issued by the Regulatory Authority. In case of filing of an appeal the amount of penalty is not payable till the date appeal is finally determined or withdrawn.
When the Licensee has not met the Economic Substance Test and in case of High Risk IP Business, the Regulatory Authority is to provide the relevant information to the Ministry of Finance. The Ministry of Finance, pursuant to an international agreement/treaty or similar international arrangement to which UAE is a party shall provide the same information to the Foreign Competent Authority of the country or territory where the parent company, the ultimate parent company and the ultimate beneficial owner of the Licensee resides. In addition to this, in case the Licensee is incorporated outside the UAE, the Ministry of Finance shall provide this information to the Foreign Competent Authority of the country or territory where the Licensee is incorporated.
Recent Changes Made in the Economic Substance Regulations in the UAE
1. Appointment of Federal Tax Authority as National Assessing Authority to make assessments,
impose penalties and hear the appeals
2. New Ddefinition of Licensee, now a Licensee is eithera Juridical Person (incorporated inside
or outside the UAE); or an Unincorporated Partnership registered in the UAE, including a
Free Zone and a Financial Free Zone and carries on a Relevant Activity.
3. Introduction of Exempted Licensees. Exempted Licensees need not to meet Economic
Substance Test.Exempted licensees are:
● an investment fund.
● an entity that is tax resident in a jurisdiction other than the UAE.
● an entity wholly owned by UAE residents and meets the following conditions:
(i) the entity is not part of a Multinational Enterprise Group.
(ii) all of the entity's activities are only carried out in the UAE.
● a Licensee that is a branch of a foreign entity the Relevant Income of which is subject to tax
in a jurisdiction other than the State.
How Bizilance can assist companies with reference to ESR?
The most important element for ESR is the assessment whether ESR is applicable on a company or
not. The second significant aspect is criteria given in these Regulations to meet the Economic
Substance Test. We provide the below services:
- Initial Assessment
- Preparation of Notification
- Advisory on requirements of Economic Substance Test
- Preparation of Annual Report