As a committed member of OECD inclusive framework, and in response to the UAE’s tax framework by the European Union (EU) Code of Conduct Group on Business Taxation, the UAE introduced a resolution on the Economic Substance on 30th April, 2019. Guidance that provides further clarity on the application of the Regulations was issued on 11 September 2019.
The regulations are applicable to UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.
Following are the relevant activities:
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP”)
- Distribution and Service Centre Business
Activities that must be conducted by a licensee in the State shall include:
In respect of Banking Business:
- Raising funds, managing risk including credit, currency and interest risk.
- Taking hedging positions.
- Providing loans, credit or other financial services to customers.
- Managing capital and preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business.
In respect of insurance Business:
- Predicting and calculating risk.
- Insuring or re-insuring against risk and providing Insurance Business services to clients.
- Underwriting insurance and reinsurance.
In respect of Investment Fund Management Business:
- Taking decisions on the holding and selling of investments.
- Calculating risk and reserves.
- Taking decisions on currency or interest fluctuations and hedging positions.
- Preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business.
In respect of Lease-Finance Business:
- Agreeing funding terms.
- Identifying and acquiring assets to be leased (in the case of leasing).
- Setting the terms and duration of any financing or leasing.
- Monitoring and revising any agreements.
- Managing any risks
In respect of Headquarters Business:
- Taking relevant management decisions.
- Incurring operating expenditures on behalf of group entities.
- Coordinating group activities
In respect of Shipping Business:
- Managing crew (including hiring, paying and overseeing crew members).
- Overhauling and maintaining ships.
- Overseeing and tracking shipping.
- Determining what goods to order and when to deliver them, organizing and overseeing voyages.
In respect of Holding Company Business, all activities related to that business; and in respect of Holding Company Business that derives income from other sources other than dividends and capital gains from its equity interest, the state Core Income-Generating Activities shall be those activities associated with the income generated.
In respect of Intellectual Property Business:
(a) where the Intellectual Property Asset is a –
- Patent or an asset that is similar to a patent, research and development.
- Non-trade intangible (including a trademark), branding, marketing and distribution.
(b) If the Relevant Activity is conducted by a Licensee that is regarded as a High Risk IP Licensee, the State Core Income-Generating Activity must include any of the following additional activities:
- Taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income.
- Taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset.
- carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties.
In respect of Distribution and Service Center Business;
- Transporting and storing component parts, materials or goods ready for sale.
- Managing inventories.
- Taking orders.
- Providing consulting or other administrative services.
The regulations provide a definition to each of the above Activities. The provisions of the Regulations shall not apply to Companies in which the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital. The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are governed by the Regulations will need to submit a notification to their Regulatory Authority (defined under Cabinet Decision No (58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards, and prepare and submit to the same Regulatory Authority an economic substance declaration within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the economic substance test and file an economic substance declaration for any financial period in which it has not earned income from a Relevant Activity. Failure by an entity to comply with the Regulations shall result in administrative penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and potential suspension, revocation or non-renewal of its registration.
Deadline for notification under the Economic Substance Regulations (ESR)
Earlier the deadline under the ESR was 30th March 2020, which is now postponed to 30th June, 2020.
The following are the list of free zone ESR regulatory authorities and the deadline for the annual ESR notification:
|Jurisdiction||Relevant Authority||ESR Notification Deadline|
|Dubai Airport Free Zone (DAFZA)||Dubai Airport Free Zone Authority||31-May-20|
|Dubai Silicon Oasis (DSO)||Dubai Silicon Oasis Authority||Deadline Extended till Further Notice|
|Dubai Multi Commodities Center (DMCC)||Dubai Multi Commodities Center Authority||30-Jun-20|
|Dubai International Financial Centre (DIFC)||Dubai International Financial Centre||30-Jun-20|
|Dubai World Trade Centre (DWTC)||Dubai World Trade Centre Authority||30-Jun-20|
|Dubai Aviation City Corporation (DACC)||Dubai South||07-Jun-20|
|Ras Al Khaimah International Corporation Centre (RAK ICC)||Ras Al Khaimah International Corporation Centre Authority||30-Jun-20|
|Ras Al Khaimah Economic Zone (RAKEZ)||Ras Al Khaimah Economic Zone Authority||30-Jun-20|
|Abu Dhabi Global Market (ADGM)||Abu Dhabi Global Market Authority||30-Jun-20|
|Ajman Free Zone (AFZ)||Ajman Free Zone Authority||30-Jun-20|
|Sharjah Airport International Free Zone||Sharjah Airport International Free Zone Authority||30-Jun-20|
|Hamriyah Free Zone (HFZ)||Hamriyah Free Zone Authority||30-Jun-20|
|Sharjah Media City (Shams)||Sharjah Media City Free Zone||30-Jun-20|
|Fujairah Free Zone (FFZ)||Fujairah Free Zone Authority||15-Jun-20|
|International Free Zone Authority (IFZA)||International Free Zone Authority||30-Jun-20|
|Creative City Fujairah (CCF)||Creative City Fujairah Free Zone||31-Jul-20|
|Umm Al Quwain Free Trade Zone||UAQ Free Trade Zone Authority||30-Jun-20|
|LLCs & other Mainland Companies||UAE Ministry of Economy||30-Jun-20|
Penalties for non-compliance of ESR Notification Filing
Every company in the UAE needs to file the Economic Substance notification with the regulatory authority to inform whether or not they are carrying out the substantial economic activity within the UAE. This is a mandatory requirement and failing to ensure the filing or filing inaccurate information will attract hefty penalties. The penalties for both the mistakes will lead to penalties in the range of AED10, 000 – AED50, 000.
To get still more details on ESR you can refer the link below, in which you will get more information on ESR by Institute of Chartered Accountants
All companies registered in UAE should carefully assess if the activities that they carry out fall under one of the nine Relevant Activities. If this is the case a deep analysis has to be done in order to understand if Economic Substance Test requirements are met or if any adjustment has to be taken into consideration.
Among others, following actions may help to meet the Economic Substance Test requirements:
- Migration from offshore company register to onshore Free Zone;
- Upgrading flexi desk to real office
- Outsourcing activities to qualified providers