UAE Economic Substance Regulations (ESR)
As part of UAE’s commitment to “The Organization for Economic Cooperation and Development (OECD)” all UAE member companies that undertake any “Relevant Activities” are required to file a notification to the Ministry of Finance (MOF). This notification is required to be filed once at the end of every financial year with certain information on the licensee and its activities in the UAE. The notification is a pre-requisite to filing an “Economic Substance Report” if required for relevant activities that are not exempted- prepared by an accountant or auditor for the reportable period.
These regulations apply to companies whose financial years commence on or from 1st January 2019. Entities that are within the scope of “Relevant Activities” are required to submit an annual notification electronically on the Ministry of Finance Portal at the end of their financial year (within a 6 month period), and if required, complete and submit the Economic Substance Report within 12 months from the end of their respective financial year.
An entity is not required to file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets one of the conditions for being exempt.
A notification must be filed if you are a corporate entity (e.g. Limited Liability Company, Public Joint Stock Company, Private Joint Stock Company, etc.) or a partnership (Limited Liability Partnership, General Partnership etc.) that undertakes any of the following Relevant Activities in the UAE, during the relevant Financial Year.
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquarter Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Centre Businesses
A UAE business that undertakes one or more of the above activities during the relevant Financial Year is referred to as a Qualified Licensee. Where a business carries out one or more of the above activities but is exempt from certain requirements under the Economic Substance Regulations, the entity is referred to as an Exempted Licensee. For the sake of clarity, a Qualified Licensee and an Exempted Licensee are both required to submit a Notification, but not an ESR report if they are exempt.
Where a company claims to be an ‘Exempted Licensee’ it must indicate the basis for the exemption under and provide the necessary documentation to evidence its exempt status.
An Exempted Licensee is not required to submit an Economic Substance Report and demonstrate Economic Substance in the UAE for reportable periods in which it meets the requirements of being an Exempted Licensee.
The criteria for being an exempted license are as follows:-
- The Licensee is (i) wholly owned by UAE national or UAE resident individuals that reside in the UAE (ii) is not part of a multinational group and (iii) only operates in the UAE;
- The Licensee is an Investment Fund as defined in the Regulations;
- The Licensee is a special purpose vehicle or investment holding company of an Investment Fund as defined in the Regulations;
- The Licensee is resident for tax purposes in a jurisdiction other than the UAE;
- The Licensee is a UAE branch of a foreign company and all income of the UAE branch is subject to tax in the jurisdiction of the foreign company;
- Non-compliance with the obligation to file a Notification before the company’s deadline is subject to a penalty of AED 20,000.
- Providing incorrect or false information in the Notification is subject to a penalty of AED 50,000. 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 for the relevant Reportable Period.
If you carry out a relevant activity and would like us to file a notification on your behalf, our fee will be AED 2,500 + 5% VAT.
If you would like further information on ESR please feel free to email Shafran for further details – firstname.lastname@example.org.
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