Since the introduction of Economic substance Regulations in UAE, the business landscape has majorly changed for offshore and free-zone companies. Previously, business entities were subject to Value Added Tax (VAT) and Anti Money Laundering (ALM) only but now compliance pressure has increased to prevent companies to be involved in any illicit and illegal practices of tax avoidance or erosion. Thus, it is highly recommended for entities operating in UAE including mainland, free zones, and offshore to re-assess business status as a Licensee or an exempted Licensee as soon as possible. Also reconsider whether to conduct a Relevant Activity under the New ESR and new guidance, which will lead to making the appropriate compliance filings. Those entities that qualify as a Licensee, has conducted a Relevant Activity, and derived income from the same in the reporting period, should start preparation of the documents and information required to show how the economic substance test is met.

The New amendments in ESR include several regulatory authorities’ responsibilities for receiving economic substance notifications, economic substance reports, and all supporting documents. However, the new guidance suggests that if a business qualifies as a Licensee, then it has to file notifications with the UAE Ministry of Finance, via an online portal, which will be launched within six months from the end of the financial year. Additionally, the free zone companies are required to file and submit the Economic Substance Notification to the concerned free zone authorities while the mainland companies need to notify the Ministry of Economy if only if they carried relevant activity.

The purpose of this Notification is to provide the concerned Regulatory Authorities with certain initial information on the Licensee and its activities in the UAE and is a prerequisite to filing an Economic Substance return for the Reportable Period.

While filing the Economic Substance notification in the UAE, the companies need to demonstrate that

1. Whether or not they are carrying out the relevant activity in the UAE
2. Whether the company’s earnings are subject to tax outside the UAE
3. Date of the financial year-end

Relevant Activity 

A ‘substance over form’ approach must be used to determine whether the Licensee carried on a Relevant Activity. This means looking beyond what is stated on the commercial license to the activities undertaken during the Reportable Period. Filing Economic Substance Regulation Notification is a mandatory requirement for all the  UAE business that undertakes any of the following Relevant Activities during the relevant accounting period 

• Headquarter Businesses 
• Shipping Businesses
• Holding Company Businesses
• Intellectual Property Businesses
• Distribution and Service Centre Businesses 

Earnings from a Relevant Activity 

It means all gross income earned from that activity as recorded in the books and records of the Licensee for the Reportable Period prepared under applicable accounting standards, including income that is generated outside of the UAE.

Reportable Period

The Reportable Period is the financial period to which the ES Notification relates. Licensees are required to include the “start” and “end” date of the relevant financial period. 

The ES Notification must be filed by emailing a copy of the completed and signed form to economicsubstance@adgm.com. 

Notification Requirement for UAE Branches 

The updated Economic Substance Regulation recognizes that UAE branches of a UAE company don’t have separate legal personalities from their parent or head office. Therefore, if a branch of a UAE parent entity is registered in the UAE, it no longer needs to file separate notifications. All that’s needed is a single notification concerning the Relevant Activities of the UAE parent company together with all UAE branches in a consolidated manner. 

Filing Notification in Case of Exemption in Dubai, Abu Dhabi, Sharjah, UAE

Licensees that are 51% directly or indirectly owned by the UAE Federal Government, the Government of an Emirate, or any governmental authority or body of the UAE Federal or an Emirate government must file an ES Notification in order to claim an exemption from having to file an Economic Substance Return to demonstrate economic substance in the UAE. Such Licenses may be asked to provide supporting documentation to substantiate their government ownership. 

It is also important to note that knowingly providing incorrect or false information or incorrectly claiming an exemption from the Economic Substance Regulations can result in the Licensee being deemed to have failed the Economic Substance Test and is subject to heavy penalties for the relevant accounting period. 

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Related Articles:

ESR on Banking and Insurance Business

What are the matters a Licensee should consider under ESR?

Penalties for Non-Compliance with Economic Substance Regulations

Requirements to meet Economic Substance Test

What activities to be conducted for ESR?

Economic Substance Regulations FAQs and Filing Requirement