In response to an assessment of the UAE’s tax framework by the European Union (‘EU’), the UAE introduced a Resolution on the Economic Substance Regulations (the ‘Regulations’) on 30 April 2019. The Regulations require UAE mainland and free zone companies and other UAE business forms (including Dubai International Financial Centre (‘DIFC’) and Abu Dhabi Global Market (‘ADGM’)) that carry out any of the ‘Relevant Activities’ listed below.
What are the Economic Substance Regulations?
The UAE introduced Economic Substance Regulations to honour the UAE’s commitment as a member of the Organization for Economic Cooperation and Development (‘OECD’) Inclusive Framework on Base Erosion and Profit Shifting (‘BEPS’) and in response to a review of the UAE tax framework by the EU. The purpose of the Regulations is to ensure that UAE entities that undertake certain activities are not used to artificially inflate profits that are not commensurate with the economic activity undertaken in the UAE.
When did the Regulations come into force?
The Regulations came into force on 30 April 2019, guidance on the Regulations was issued on 11 September 2019, the regulatory authorities were identified in a Ministerial Resolution issued on 4 September 2019 and amendments were made to the regulations in Cabinet Decree No. 7 of 2020 issued on 19 January 2020. The 31 March 2020 deadline previously advised is no longer applicable. A new deadline will be announced.
To whom do the Regulations apply?
The Regulations primarily apply to companies carrying out a ‘Relevant Activity’, i.e., banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centers.
What are the penalties for failure to comply with the Regulations?
Failure to notify OR to provide accurate or complete information OR to demonstrate sufficient economic substance in the UAE for the relevant Financial Year:
- AED10,000 – AED50,000.
Failure to provide information exchange with the foreign competent authority in relation to 1. Parent company; 2. Ultimate parent company; and 3. Ultimate beneficial owner:
- AED10,000 – AED50,000.
Failure to provide any of the above for the second Financial Year:
- AED100,000 – AED300,000; and
- The commercial license could be: suspended, withdrawn or not renewed.
How can we help you?
M&A has a specialized Corporate Compliance Team capable to support and guide you through your compliance with the Economic Substance Regulations. Initially, we examine your business activity in detail and assess the applicability of the Economic Substance Regulation on your activity.
If your business activity falls within the Relevant Activities, we will support you in filing the required notification and information with the relevant authority. We shall conduct Impact Study and Gap Analysis in order to assess whether your business activity complies with the Regulations.
Should you require our assistance to assess the impact of the ESR on your business, please feel free to email us at firstname.lastname@example.org or call at +971 4 435 5959, we will be glad to assist.