UAE's Economic Substance Regulations – what you need to know about the new amendments

In April 2020, we updated you on the UAE Cabinet Resolution No. 31 of 2019 concerning Economic Substance Regulations. 

Recently, the UAE Cabinet of Ministers revoked the original resolution from 2019 and issued a revised regulation through Cabinet Resolution No. 57 of 2020, which we'll refer to here as the New ESR. Supplementary guidance for the New ESR was subsequently provided through Ministerial Decision No.100 of 2020 from the UAE Ministry of Finance, which replaces the previous Decision No. 215 of 2019, and includes an updated Relevant Activities Guide attached as an appendix.

Here, we'll explore the key amendments under the New ESR you need to consider, outline what you can expect next, and provide steps you should take to ensure you're prepared.

Unpacking the key amendments

The definition of Licensees has changed

The definition of "Licensees" which are required to comply with the New ESR now only applies to a corporate person (incorporated inside or outside of the UAE), or an unincorporated partnership – each having a presence in the UAE and conducting a Relevant Activity.

If you are a natural person, trust, sole proprietor, or foundation, you no longer fall within the scope of the definition.

There are new exemption categories 

These new exemption categories now include:

• investment funds
• entities which are wholly owned by UAE residents and which are not part of a multinational enterprise group and which only carry out their activities in the UAE
• entities which are a tax resident outside of the UAE, and
• branches of foreign parent companies where the relevant income is subject to tax outside the UAE.

Majority government-owned entities are no longer exempt, unless they fall within one of the updated exemptions of the New ESR.

If you are a Licensee and wish to benefit from the exemption you will need to provide evidence that your entity qualifies for an exemption.

UAE company branches don't need to file separate notifications anymore

The New ESR recognises that UAE branches of a UAE company don't have separate legal personalities from their parent or head office. Therefore, if you are a branch of a UAE parent entity and are registered in the UAE, you no longer need to file separate notifications. All that's needed is a single notification concerning the Relevant Activities of your UAE parent company together with all your UAE branches.

Reporting requirements for UAE companies with non-UAE branches have been modified

If you are a UAE company that conducts a Relevant Activity only through a branch registered outside the UAE, your UAE company doesn't need to report and demonstrate economic substance in situations where the income earned through the branch is taxed in the oversees jurisdiction where the branch is registered.

Foreign companies with UAE branches also have relaxed reporting requirements

If you are a foreign company with a branch office registered in the UAE, then you don't need to demonstrate economic substance under the New ESR, provided that the income earned by your branch’s activities, that would conceptually fall into a Relevant Activity category, is subject to tax in your overseas jurisdiction.

The definitions for connected person and group have changed

New definitions for "connected person" and “group” have been introduced. These will impact the assessment regarding whether you are conducting the headquarters business, distributions and service centre business, as well as high risk IP Business Relevant Activities.

The requirement to import and store goods inside the UAE is a thing of the past

The requirement to import and store goods inside the UAE – which was previously required for the "distribution" part of the Distribution and Service Centre Business Relevant Activity – is no longer applicable. 

Furthermore, for the "service centre" element of this Relevant Activity, the services provided by Licensees no longer need to be provided "in connection with a business outside of the UAE", but rather any services provided to a foreign related party would appear to result in your business as a Licensee possibly falling into this category.  

The UAE Federal Tax Authority is now in charge of compliance and control 

The UAE Federal Tax Authority has been appointed as the National Assessing Authority to oversee compliance and control of the New ESR.

If you're a Licensee, you'll have to file a notification with the UAE Ministry of Finance

The New ESR still includes several regulatory authorities’ responsibilities for receiving economic substance notifications, economic substance reports, and all supporting documents.

However, the new guidance suggests that if your business qualifies as a Licensee, you will have to file notifications with the UAE Ministry of Finance, via an online portal – which, as of this update, is still to be launched – within six months from the end of your financial year.

Penalties have been increased

The penalties under the New ESR have been increased, including the administrative penalties for non-compliance, which are now between AED 20,000 and AED 50,000. If you fail to meet the economic substance test your business could incur a penalty of AED 50,000; you might also face the suspension or non-renewal of your license as additional penalties.

What happens next?

In the absence of updated filing deadlines, it appears that the deadline for economic substance reports for the 2019 financial year will remain 12 months after the end of the relevant financial year. If you're a Licensee, this might be as early as 31 December 2020. 

It's important to note that all Licensees (including exempted Licensees) are required to file notifications on the new online portal once it's available, regardless of whether they have already submitted notifications for the 2019 financial year under the old legislation.

Your next steps

If you have a UAE business – including entities registered in free zones and offshore entities – we recommend you re-assess whether you qualify as a Licensee or an exempted Licensee as soon as possible. Alongside this, we encourage you to urgently reconsider whether you're conducting a Relevant Activity under the New ESR and new guidance. Doing so will enable you to make the appropriate compliance filings when the new filing portal becomes available.

Given that the end of the 12-month period following a Licensee’s 2019 financial year is approaching for many entities, we also recommend that you look beyond the first stage notification filing. If your UAE entity qualifies as a Licensee, has conducted a Relevant Activity, and derived income from the same in the reporting period, it would be prudent to start preparation of the documents and information required to show how the economic substance test is met. 

If any gaps are identified, it's crucial for you to plan and implement a mitigation strategy to ensure compliance and avoid severe consequences in the future. 

Here to help

For further information or for assistance with your evaluations or filings, please contact me or a member of the Corporate/M&A and Capital Markets team in our Dubai office.