The UAE recently introduced new legislation called the Economic Substance Regulations (ESR) to ensure that all businesses operating in the UAE are contributing to its economy and not merely acting as a shell company. These regulations give the government an overview of a business’s financial activities, ensuring all profits and expenditures align with their activities in the UAE.
The ESR requires all entities with commercial licenses to submit an annual economic substance report for each financial year, giving details about their financial activities and showing that they are actively contributing to the UAE’s economy rather than just acting as a holding company. The ESR stipulates that the business must conduct core income-generating activities in Dubai, whether it is a limited liability company or a free zone company. Core income-generating activities include but are not limited to manufacturing, holding IP rights, banking, insurance, leasing, fund management, and investment fund management.
Who needs to submit a Economic Substance Report?
An Economic Substance Report must be filed by a corporate entity (Limited Liability Company, Public Joint Stock Company, Private Joint Stock Company, etc.) or a partnership (Limited Liability Partnership, General Partnership etc.) that is not an Exempted Licensee and that derives Relevant Income from any of the following Relevant Activities during a Reportable Period (see Section C, Question 1):
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquartered Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service Centre Businesses
Please refer to the Relevant Activities Guide in Schedule 1 of Ministerial Decision 100 of 2020 issued by the Ministry of Finance for further information and an explanation of each of the above Relevant Activities.
Can a single Economic Substance Report be filed for multiple Licensees?
No, each Licensee must file an Economic Substance Report on a stand-alone basis, irrespective of whether the Licensee is part of a consolidated group for financial reporting or VAT purposes.
What are the reporting requirements for branches?
A UAE corporate entity that operates through one or more branches registered in the UAE must report the Relevant Activities of itself and those of its UAE branches in one composite Economic Substance Report.
A UAE branch of a foreign entity is not required to file an Economic Substance Report if the Relevant Income of the UAE branch is reported and subject to tax in the jurisdiction of the foreign parent / head office.
Where a UAE entity carries on a Relevant Activity through a foreign branch or permanent establishment that is subject to tax in the foreign jurisdiction, the UAE entity should not report (i.e. exclude) in its Economic Substance Report the Relevant Income, assets, expenditure and employees of the foreign branch or permanent establishment.
What is the deadline for filing the Economic Substance Report?
The Economic Substance Report must be filled within 12 months from the Licensee’s financial year end.
How should the Economic Substance Report be filed?
The Economic Substance Report must be submitted electronically on the Ministry of Finance portal.
What if the Licensee is in the process of being liquidated?
If the Licensee undertakes a Relevant Activity in the year of liquidation, the entity or its liquidators must ensure that all obligations under the Economic Substance Regulations are satisfied for the period up to liquidation, including the filing of a Notification and Economic Substance Report (where applicable).
What happens if a Licensee does not submit an Economic Substance Report, although it is required to do so?
Non-compliance with the obligation to file an Economic Substance Report before the deadline is subject to a penalty of AED 50,000, and can result in the Licensee being deemed to have failed the Economic Substance Test for the relevant accounting period.
What happens if the information provided in the Economic Substance Report is incorrect?
Providing incorrect or false information in the Economic Substance Report 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.