DIFC firms face March 2020 economic substance rules deadline

The precise form that the notification must take has still to be clarified, but the DIFC confirmed that financial service providers regulated by the Dubai Financial Services Authority (DFSA) are among the businesses that will be subject to the notification requirement. The obligation will also apply to non-regulated businesses, which includes branch operators in the DIFC whose businesses might be submitting similar ESR notifications in other jurisdictions.

The notifications are to be made to the DIFC’s Registrar of Companies, and the Registrar is to act as the supervisory authority in relation to compliance with the ESRs within the DIFC.

ESRs have been introduced across the globe in countries with no or nominal corporate tax rates in order to comply with international initiatives to combat harmful tax practices. ESRs were introduced in the UAE in April 2019. Introducing them has ensured that the UAE has been removed from an international blacklist of non-cooperative countries for tax purposes. In essence the new rules require certain legal entities established in those countries to demonstrate that they carry out substantial economic activities there.

Any entity licensed in the UAE to carry out a 'relevant activity' whether onshore or in a free zone and including in a financial free zone, is required to comply with the economic substance rules. The 'relevant activities' are: insurance; banking; lease financing; investment fund management; shipping; holding company; intellectual property; company headquarters, and distribution and service centres.

Businesses face financial penalties if they fail to comply with the ESRs in the UAE.

Although the new rules took effect in the UAE in April 2019, there has been uncertainty over the steps businesses need to take to comply. In October 2019, the Ministry of Finance in the UAE published guidance on the ESRs and the regulatory authorities responsible for administering the rules were appointed. However, there has been a continued lack of clarity over how the rules apply within the DIFC.

Financial services expert Tom Bicknell of Pinsent Masons, the law firm behind Out-Law, said: "Whilst the DIFC has taken steps to provide firms based in the financial freezone with more clarity, significant areas of uncertainty and concern remain. DIFC-based firms are nonetheless advised to take note of the 31 March 2020 deadline and where necessary seek advice now to assess whether or not they are undertaking a 'relevant activity' for the purposes of the economic substance rules."