What’s new?
Following the introduction of the Economic Substance Regulations (“ESR”) earlier this year, the Ministry of Finance is considering the deadline of notification filing per jurisdiction/authority. It is currently anticipated that this date will be 31st March 2020 for most jurisdictions within the UAE.
See our previous articles on the subject:
UAE Economic Substance Law Briefing
UAE Economic Substance Regulation Update: Guidance Released
Key take-aways
- The vast majority of UAE establishments have a financial year ending on 31 December. If the deadline of notification is confirmed, they would then be required to provide information by 31st March 2020. This obligation will apply whether or not the establishment falls within or out of the ESR scope.
- Minimum notification requirements are expected to consist of:
- Whether or not the establishment carries a relevant activity.
- Whether or not (some of them) gross income is subject to tax outside the UAE.
- Date of financial year-end
- Establishments that conduct a Relevant Activity will be required to submit a report confirming the level of substance in place and demonstrating how this level is satisfied – (i) demonstration on how the establishment conducts its CIGA in the UAE; (ii) the extent to which it is directed and managed in the UAE; (iii) confirmation that the establishment has adequate number of qualified full-time employees in the UAE, incurs an adequate amount of operating expenditure and has adequate physical assets in the UAE.
- Pure equity holding companies will be subject to less stringent economic substance requirements. SPVs/IBCs typically used in this context will be required to confirm the specific asset/s (types) that is being held by the SPVs/IBCs – in form of a spreadsheet.
- A company will not be considered “holding company” for the purposes of ESR if it derives income from sources other than dividend and capital gains (e.g. companies which hold real state, bonds, securities and etc.)
- An establishment that fails to comply with ESR will face penalties that may range from AED 10,000 to AED 300,000, as well as administrative actions including suspension or strike-off.
What’s next?
ESR took effect on 30 April 2019. There are a number of actions which relevant Licensees must be undertaking to ensure compliance – from clarifying their entity classification, to the structuring of contractual and delegation arrangements, the review and organization of their internal governance, their employment and premises arrangements and the capturing of relevant business information which will be required for the preparation and filing of reporting information to the Regulatory Authority.
Even entities not deploying a Relevant Activity should implement proper corporate governance mechanisms in order to avoid any risk of failing the Economic Substance Test.
If you operate a business in the UAE or hold shares in a UAE structure, we highly recommend that you take an active role in auditing your corporate arrangements with the view to bring in the necessary level of corporate substance.
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