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The UAE introduces new economic substance regulations

  • UAE
  • Banking and finance
  • Commercial agreements
  • Corporate
  • Tax planning and consultancy

05-10-2020

 

On 10 August 2020, the UAE Cabinet issued Cabinet Resolution No. (57) of 2020 concerning Economic Substance Regulations (the “ESR”) which repeals and replaces the previous set of regulations issued in 2019. The UAE government has also issued updated guidance (“Guidance”) providing further clarity on the scope of application of the ESR.

Although the legal framework of the ESR remains largely the same, a number of key changes to the economic substance regime have been introduced.

What is new?

Key changes introduced by the ESR include:

MOF portal

A new centralized portal (under the purview of the UAE Ministry of Finance) has been created through which companies that are subject to the ESR can submit relevant notifications. The UAE Federal Tax Authority will now be responsible for assessing compliance with, and enforcement of, the ESR. ESR submissions will now be directly submitted to the UAE Ministry of Finance Portal.

Changes to the definition of a licensee

Natural persons, sole proprietors, trusts and foundations are no longer subject to the ESR and, as such, they are not required to file economic substance notifications. The ESR will continue to apply to legal entities and unincorporated partnerships which conduct a ‘Relevant Activity’. Other clarifications have been made relating to the treatment of certain types of legal entities.

Changes to exemptions

New exemptions have been introduced for entities that are tax resident outside the UAE, investment funds, entities that are wholly-owned by UAE residents (subject to certain criteria) and UAE branches of a foreign entity whose parent is subject to tax in the relevant foreign jurisdiction. The exemption that had previously carved out entities owned at least 51% by a UAE government authority has been removed.

Applicability during liquidation or winding up

Entities that are subject to ESR must still satisfy their obligations if they are still conducting “Relevant Activities” while undergoing liquidation or being wound up.

Outsourcing

The previous regulations did not explicitly set out what activities may be outsourced to allow licensees to meet their economic substance obligations. The ESR has now clarified this by outlining those activities that may be outsourced (as well as applicable requirements in case any activities are outsourced outside the UAE).

Exchange of information

The ESR provides that the UAE Ministry of Finance will exchange information with foreign competent authorities in relation to any entity applying for an exemption on the basis that it is subject to tax outside the UAE.

Penalties

Administrative penalties for violations of the ESR are now set out as fixed amounts (depending on the relevant violation) rather than as a range, as was previously the case. The penalties have been revised as follows:

 

  • The penalty for failing to submit the economic substance notification is set at AED20,000.
  • The penalty for failing to meet the economic substance test or submit the economic substance report or providing inaccurate information is AED50,000. If the violation is repeated in the consecutive financial year, a penalty of AED400,000 shall apply.

 

What is next?

Relevant entities previously subject to economic substance reporting will have to reassess their position to determine whether their obligations have changed under the ESR. The ESR is retroactive, meaning that it applies from 1 January 2019 and all licensees and exempt licensees are required to re-submit their economic substance notifications through the designated Ministry of Finance portal once it becomes available. Although the ESR is silent on the timeframe within which a resubmission should take place, regular submissions are to be submitted within six months of the relevant entity’s financial year end.