9 March 2020
On 30 April 2019, the UAE Cabinet Resolution No. 31 of 2019 concerning Economic Substance Regulations (Regulations) came into force.
The Regulations impose an obligation for all entities (including natural or juridical) registered, incorporated and/or licensed in the UAE, including all free zones (each a Licensee), to report on their "Relevant Activities" as defined in the Regulations commencing January 2020.
There is a two-stage approach to the reporting:
Relevant Activities comprise a broad list of undertakings, including:
When assessing whether your business's operations fall within the parameters of a Relevant Activity, a substance over form approach is recommended. It is important not to simply rely on the description of your business as categorised in the licence registration documentation, but to look more carefully at the actual nature of the activities of the business itself.
Furthermore, Licensees should be aware that even if most of their activities fall outside the definition of Relevant Activities and would therefore not be considered relevant, if even a small minority of their activities – as little as one activity – are within scope, it would trigger the reporting obligation.
The Ministry of Finance and other concerned authorities involved in the reporting process are currently finalising the reporting templates. The DIFC regulator has already communicated that it intends to have the initial "first step" reporting – which is mandatory for every DIFC registered entity – setup to be completed by the end of March 2020.
With the tight timetable ahead, there is limited period to make an assessment as to whether an entity trades within the definition of a Relevant Activity and within the relevant reporting period; the latter being the financial year of each Licensee that commenced on 1 January 2019 or thereafter.
For Licensees whose financial year commences post 1 January 2019 (and therefore may not have ended), a prompt appraisal of the Regulation's application will allow them sufficient time to complete the outstanding actions required to ensure they're compliant with the Regulations prior to the end of their financial year.
Such activities could include:
Sound timekeeping, good corporate governance and accurate record keeping are important tasks to ensure compliance with the Regulations. The authorities will not necessarily prompt Licensees to fulfil their reporting obligations, and therefore a proactive approach is advised to avoid non-compliance penalties arising from incomplete, inaccurate or overdue reporting submissions.
Penalties can include financial fines, as well as license suspension or even being struck off from the register. UAE authorities are furthermore obliged to report non-compliance of Licensees to regulators of other countries where the Licensees' headquarters and/or shareholders are based.
Goethe once observed: "Knowing is not enough; we must apply. Willing is not enough; we must do." We strongly recommend that the management of all UAE registered and/or licensed businesses take appropriate action. If you are unsure about the application of the Regulations or the requirements to be met in order to ensure compliance, please contact a member of our Corporate team.