Changes of economic substance rules in the UAE

Changes of economic substance rules in the UAE

In September 2020 the information on renewal of economic substance (ES) rules in the UAE has been published on the official website of Ministry of Finance. ES rules are in force in UAE since 1 January 2019 and apply to UAE legal entities.

ES rules establish duties of UAE companies to have managing bodies in the territory of the UAE (e.g. resident directors), to dispose an adequate number of employees, premises and physical assets directly or through outsourcing agent, and to incur expenditures in the UAE.

These rules are applicable to companies which conduct particular business activities expressly mentioned in laws as qualifying companies to be compliant with ES requirements and called “Relevant Activities” (banking and insurance business, investment fund management, finance and lease business, holdings, headquarters, shipping, etc.).

Changes of ES rules are established by Cabinet of Ministers Resolution №57 of 10 August 2020 which replaces previous Cabinet of Ministers Resolution of 30 April 2019 fully, while the ES rules’ interpretation and certain practical application issues are highlighted by new Guidance on ES rules. The main aspects affected by said changes are described below.

Exempted entities

One of the most important aspects is the exemption from duties under ES rules provided for particular types of legal entities registered in the UAE, including Free Zones and Free Economic Zones:

  1. Investment funds which are not self-managed by its bodies, i.e. managed by other persons externally;
  2. UAE companies tax resident in foreign jurisdictions;
  3. UAE companies wholly owned by UAE residents, if they are not a part of international group of companies and conduct business activity only in the territory of the UAE;
  4. Branches of foreign companies which are taxed on their income in foreign jurisdictions.

Previously existing exemption for companies, the UAE’s direct or indirect interest in capital of which exceeded 51%, has been repealed by Resolution №57.

In light of establishment of abovementioned exemptions it is clarified that the requirement to file Notification applies to exempted entities as well. In such case the provision of documents proving the reason for exemption from ES requirements will be necessary (e.g. certificate of tax residency in foreign jurisdiction, certificate of registration of a foreign entity’s branch, register of members, etc.).

ES Notification

The Notification must be filed in all cases electronically through the Ministry of Finance Portal in 6 months from the date of the end of company’s financial year, starting from 2019 financial year. Taking into account that the first ES Notifications should be filed before 30 June 2020, the electronic re-filing through the Ministry of Finance Portal is required once the information that said Portal is in function is published.

Resolution №57 establishes new wording for contents of Notification, which must include:

  1. The information of Relevant Activity that was carried out by the company during its financial year;
  2. The information regarding generation of income from such Relevant Activity;
  3. The date of commencement and the date of the end of financial year;
  4. Other information or documents as may be requested by UAE authorities.

If the UAE company carries out any Relevant Activity named by Resolution №57 (they are same to those previously named by Cabinet of Ministers Resolution of 30 April 2019), generates relevant income and does not fall within any exemption from ES requirements, it must also file ES Report with UAE competent authorities, as well as it must comply with ES requirements (their essence also has not been changed in comparison with previous version of ES rules).

ES Report

ES Report must be filed by UAE company not later than in 12 months after its financial year’s end date, i.e. the first ES Report filing deadline is 31 December 2020. It must include the following information:

  1. the type of Relevant Activity of a company;
  2. the amount and type of income from the Relevant Activity;
  3. the amount and type of expenses and assets in respect of the Relevant Activity;
  4. the location of the place of business and, if applicable, plant, property or equipment used for the Relevant Activity of the company in the territory of the UAE;
  5. the number of full-time employees with appropriate qualifications and the number of personnel who are responsible for carrying out the Relevant Activity;
  6. information showing the Core Income-Generating Activity in respect of the Relevant Activity that is conducted;
  7. financial statements of a company;
  8. a declaration as to whether or not the company complies with economic substance requirements;
  9. in case of a Relevant Activity being an Intellectual Property Business, whether it is of high risk status or not.

Liability for non-compliance

Failure to fulfil the abovementioned duties may result in liability in a form of penalties imposed on a company itself (not on its registered agent or officers). The amounts of penalties have been changed in comparison with ones established by the previous version of ES rules:

Offence Penalty
  In previous version In current version
Failure to file ES Notification 10 000 – 50 000 AED 20 000 AED (approximately 5 400 USD)
Failure to file ES Report or to comply with ES requirements 10 000 – 50 000 AED 50 000 AED (approximately 13 500 USD)
Second failure to comply with ES requirements 50 000 – 300 000 AED 400 000 AED (approximately 108 000 USD)
Provision of inaccurate information 10 000 – 50 000 AED 50 000 AED (approximately 13 500 USD)

The time limit to impose penalties on UAE company is 6 years from the date of commission of offence, but UAE competent authorities are not entitled to impose such penalties later than in 12 months after the offence came to their attention.

New ES rules are in force in UAE starting from 10 August 2020.

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