Economic Substance Regulation
The Economic Substance Regulation (the “Regulations”) was introduced for certain businesses on 30 April 2019 pursuant to the Cabinet of Ministers Resolution No.31 of 2019 as part of the United Arab Emirates (UAE’s) commitment to Organization for Economic Co-operation and Development (“OECD”) Inclusive Framework. Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020, and updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020.
The Regulations apply to all Licensees (registered with different Licensing/Regulatory Authority in UAE such as DMCC, JAFZA, DAFZA, RAKEZ, DDA, Ajman Free Zone, etc.) that determined to be conducting any of the “ESR Relevant Activity” listed below to submit ESR Notification and or Annual Report with Ministry of Finance (MOF) portal and are required to demonstrate sufficient economic substance in UAE.
These Regulations is annual compliance requirements and thus, a “Must Do” for all Onshore and Free Zone Companies in UAE.
ESR Relevant Activities are:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Shipping Business
- Lease-Finance Business
- Distribution & Service Center Business
- Headquarters Business
- Intellectual Property Business
- Holding Company Business
The process involves in determining whether the Licensee is conducting relevant activities is not solely dependent on the activities mentioned in the Trade/Commercial License, substance over form approach has to be applied by each Licensee.
If your Company is carrying one of the above ESR relevant activities, you must ensure to meet the sufficient economic substance and reporting requirements set out under ESR.
All Licensees that carry relevant activities must submit ESR Notification and Annual Report in the form and the manner approved by the Authorities. Penalties for failing to notify the Authorities is subject to penalty of AED 20,000 while failure to submit ESR Annual report on time set by the Regulations will attract penalty of AED 50,000. Penalties can go as much as AED 400,000 during repetition of non-compliance. Other penalties such suspension, withdrawal and non-renewal of Trade/Company License will also apply when Licensees fail to provide accurate or complete information and demonstrate sufficient economic substance in the UAE.
Deadlines for the submission of ESR notification ESR Annual Report are mentioned below for reference:
Asad Abbas & Co. (Chartered Accountants) can assist you in managing economic substance requirements and we can be able to advise potential risks of non-compliance for your business.
