Insights

The UAE Government introduced Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019 and Ministerial Decision No. 215 of 2019 further repealed and replaced retrospectively by the Cabinet of Ministers Resolution No. 57 of 2020 and Ministerial Decision No. 100 of 2020) in line with its commitment as a member of the OECD Framework on Base Erosion and Profit Shifting (BEPS), and to make the UAE tax framework align with the requirements of the EU to excluded UAE from the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist).

As we all know the ESR objectives are to determine the operational reality of the UAE entities undertaking Relevant Activities in the UAE while performing predefined test enlisted under the regulation. These activities are either significantly mobile activities or highly regulated activity.

Relevant Activities for ESR

Compliance

Economic Substance Regulations provide two types of compliances for the UAE entities undertaking Relevant Activities;

1. Filling of Notification: ESR notification must be submitted within 6 month from the end of the financial year of the licensee.

1. Filling of Annual Report: ESR Annual Report must be submitted within 12 month from the end of the financial year of the licensee.

(Note: ESR notification filling last date will be 30^th June, 2021 for the companies having FY Ending on 31^st December, 2020)

Economic Substance Test

Licensees conducting the relevant activity in the UAE must meet the Economic Substance Test. The test includes the following:

• The licensee conducts Core Income Generating Activities (CIGA) in the UAE
• The licensee is directed and managed in the UAE
• The licensee has an adequate number of full-time employees in the UAE
• The licensee incurs an adequate amount of operating expenditure in the UAE
• The licensee has an adequate amount of assets in the UAE

Penalty

• Failure to submit Notification on or before the due date- AED 20,000
• Penalty for providing inaccurate information- AED 50,000
• Failure to submit Economic Substance Report or failure to meet the Economic Substance Test – AED 50,000 (First time default), AED 400,000 (Subsequent default) and possible cancellation/suspension of trade license.

Current ESR Developments

A dedicated portal for licensees to submit their ESR notifications and reports has been created by The Ministry of Finance (MoF). This portal provides the guidelines, updates and technical support to the licensees. Despite the available guidance from MoF the licensees faced several challenges in meeting the ESR requirements for the submissions made for FY 2019 and exposed for penalties in case failed to comply with the ESR requirements by the Authority. In various cases licensee were not able to provide the sufficient and reasonable evidence for meeting the economic substance test and consequently faced penalty from the Authority.

How KSG Support?

Assessment Service

• Complete Assessment whether the entity performs relevant activities during the Financial Year
• Identification of core business activity carried on as compared to licensed activity
• Identification of Gaps in the organization structure with respect to economic substance test parameters
• Provide remediation options to increase the substance in the UAE considering legal, regulatory  and commercial factors
• Review the corporate and secretarial compliance
• Understanding & review of operating expenses and resource management policies and standards
• Groups may consider legal entity or contract restructuring Vs. simply increasing the level of economic substance in an entity.

Compliance Services

• Assist in Filing Notification with Regulatory Authority
• Assist in preparing annual report & its submission on timely basis