After notifying the regulatory authorities’ demonstrable relevant activities in the UAE, businesses in the mainland, offshore and free zone companies are now required to file an Economic Substance Report (ESR) by December 31, 2020 as part of the Economic Substance Regulation.
The introduction of ESR is a result of the work conducted by the Organization for Economic Co-operation and Development (OECD) under Action 5 of the Base Erosion and Profit Shifting (BEPS) project. In essence, the aim of the rules is to ensure that income/profit is allocated to the jurisdiction where the value is created / where the substance is.
By requiring licensees to have sufficient economic substance, companies can no longer artificially shift income/profits to the UAE.
As explained by Bastiaan Moossdorff, Senior Tax Adviser from Baker & McKenzie Habib Al Mulla, the main component of the report is that it requires the licensee to declare that it satisfies the Economic Substance Test. To satisfy the Economic Substance Test the licensee should:
- Carry out the Core Income Generating Activity in the UAE;
- Be directed and managed in the UAE in respect of that CIGA;
- Have adequate number of qualified full-time employees, expenditure and physical assets in relation to that activity OR level of expenditure on outsourcing to third party service provider in the UAE which has adequate expenditure, employees and physical assets in the UAE to carry out the Relevant Activity adequately;
- In case of outsourcing, the ability to monitor and control the carrying out of that CIGA by the service provider.
The economic substance report further requires the licensee to provide additional documents that should support that it satisfies the Economic Substance Test (such as type and amount of income and expenses, number of employees, minutes of board meetings etc.).
The format has not been published yet and should be published by the Ministry of Finance in due course. It should be submitted to the authority that issued the license.
Authorities are likely to impose heavy fines if businesses do not comply with reporting obligations. The first time that a licensee does not meet the Economic Substance Test or does not comply with its reporting obligation, the authority may impose a fine of between 10,000 dirhams and AED 50,000 dirhams. Failure to meet the test or comply in a subsequent year may result in a fine between 50,000 dirhams and 300,000 dirhams. The authority may also revoke, suspend or not renew the license.