As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”).
The Regulations require UAE onshore and free zone companies and certain other business forms that carry out any of the defined “Relevant Activities” to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).
The Regulations apply to Licensees that carry out any of the following Relevant Activities:
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP”)
- Distribution and Service Centre Business
The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority, and complete and submit to the same Regulatory Authority an Economic Substance Report 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 Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt.
A Notification form will need to be submitted regardless. Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority, as well as other administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.
Economic Substance Requirements New Deadline Notice
On 3rd November 2020, the Ministry of Finance published a Notice regarding Economic Substance Requirements Filing Requirements and Deadlines (“Notice”) as follows:
- New Economic Substance Requirements submission method: All Notifications and Economic Substance Reports must from now on only be submitted electronically on the Ministry of Finance Portal;
- Deadline: The Ministry of Finance Portal is expected to go live within the 1st week of December 2020, and the first official deadline for Notifications and Reports submission will fall on 31st December 2020;
- Notifications re/submission! All Licensees’ and Exempted Licensee’s Notifications must be submitted within six months from the end of the Financial Year.
- Notifications that fell due before the Ministry of Finance Portal was available; and/or Notifications that have been previously submitted with Regulatory Authorities must be reviewed according to the Resolution (if needed) and submitted/re-submitted through the Ministry of Finance Portal by 31st December 2020;
- Penalty for failing to submit Notifications: Licensees and/or Exempted Licensees with Financial Year ending on or before 30th June 2020 that fail to submit their Notifications along with the required supporting documents by 31st December 2020 will be issued a penalty of AED 20,000;
- Substance Reports: All Economic Substance Reports must be submitted within twelve months from the end of the Financial Year. Economic Substance Reports that fell due before the Ministry of Finance Portal was available will be extended to 31st December 2020;
- Penalty for failing to submit Substance Report: Licensees and/or Exempted Licensees (where applicable) with Financial Year ending on or before 31st December 2019 that fail to submit their Economic Substance Report along with the required supporting documents by 31st December 2020 will be issued a penalty of AED 50,000.