Economic substance notification deadlines in the UAE

The UAE has enacted Economic Substance Regulations (“ESR”) that applies in all UAE jurisdictions, including financial free zones such as the DIFC. In the DIFC, the ESR will be administered by the Registrar of Companies (“Registrar”) for all DIFC entities, including entities that are regulated by the DFSA.

The Ajman Free Zone Authority announced the deadline is 30 June 2020 for “economic substance” notifications for FY 2019 for all Ajman Free Zone based entities.

Previously, RAK International Corporate Centre and Ajman free zone established 30 June 2020 as the deadline for their economic substance notifications. Other regulatory authorities have yet to announce the due dates for their economic substance notifications.

The economic substance rules were included in Cabinet of Ministers Resolution No. 31 of 2019 (30 April 2019) and introduced an “economic substance” requirement for all UAE entities that reflects the level and type of activity they undertake. Economic substance broadly reflects measures relating to employees, premises, management, and costs. There are also various regulatory filing requirements that need to be met in order to comply with the regulations. The UAE rules are, in part, a reaction to the UAE having been once placed on the EU’s list of non-cooperative tax jurisdictions.

The economic substance rules were included in Cabinet of Ministers Resolution No. 31 of 2019 (30 April 2019) and introduce an “economic substance” requirement for all UAE entities that reflects the level and type of activity they undertake. Economic substance can broadly be considered to consist of employees, premises, management, and costs. There are also various regulatory filing requirements that need to be met in order to comply with the regulations.

The UAE regulations were issued, in part, as a response to European Commission concerns that resulted in the UAE being added to the EU’s list of non-cooperative tax jurisdictions. The regulations also may be viewed as further aligning UAE’s legislative framework to the standards set out in the OECD base erosion and profit shifting (BEPS) project. The regulations are similar to economic substance requirements recently implemented in jurisdictions such as the Cayman Islands and Jersey.

All UAE entities will need to examine whether they meet the “economic substance” requirements and consider how they will comply with the regulations, either by bolstering UAE economic substance or restructuring.

 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.

What can we do for you?

We Al Nuaimi Auditors have specialized team on the Subject to support and guide you on the Compliance with Economic Substance Regulation with the following roadmap:

Step I:   To study your Business Activities in detail and assess the applicability of Economic Substance Regulation on your activities. Also, to provide support and guidance on filing notification with the Relevant Authority.

Step II:  To provide the guidance and support for compliance with the provisions of the Economic Substance Regulation, if your activity is falling under the regulation. To conduct Impact Study and Gap Analysis in order to assess whether the Business meets the Compliance test and to provide the recommendations.

Step III: Reporting with Regulatory Authority on or before the Due Date.

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