UAE clarifies scope and application of economic substance regulations

The amendments may require certain companies in the UAE to re-submit their notification of the application of the ESRs to the relevant authorities, with potential administrative penalties for those which fail to do so.

The UAE Ministry of Finance issued Cabinet of Ministers Resolution No. 57 of 2020 (23 page / 493 KB PDF) in August, replacing the initial ESRs issued in April 2019. The new regulations will apply retrospectively to applicable entities whose financial years began on or after 1 January 2019. 

Corporate law expert Christopher Neal of Pinsent Masons, the law firm behind Out-Law, said the amendments were welcome.

“The various UAE mainland and free zone authorities had initially adopted their own approaches to the ESRs, with differing notification deadlines that were subject to various changes and postponements, causing confusion amongst companies and their owners,” Neal said.

“While there may be an additional administrative burden on some companies who need to re-submit notifications, these amendments bring some much-needed clarity and consistency to the notification and reporting processes,” Neal said.

The new regulations clarify that the ESRs only apply to persons with separate legal personality and unincorporated partnerships. They will not apply to natural persons, sole proprietors, or trusts, but may apply to the likes of Dubai International Financial Centre and Abu Dhabi Global Market foundations.

Individual branches of a UAE company are considered extensions of the parent and will not need to file separate notifications or annual returns, although they will still need to comply with applicable economic substance tests if they carry out activities that are different to those of their parent company.

Entities excluded from the requirement to meet the applicable economic substance test include investment funds, entities which are tax resident in another jurisdiction, entities wholly owned by UAE residents, and a UAE-incorporated branch of a foreign company where the relevant income is subject to tax in another jurisdiction.

However, these entities will still need to notify their relevant authority and provide evidence to support their exempted status.

The UAE has centralised the submission of annual notifications and annual reports, with the UAE Ministry of Finance now responsible for both sets of submissions.

Notifications will have to be submitted via an online portal within six months of a entity’s financial year end. Companies that have already submitted notifications to their relevant authority will need to re-submit their notification to the Ministry of Finance when the portal becomes available.

Meanwhile, annual reports for companies subject to the ESRs must be filed with the ministry no later than 12 months after the end of their financial years.

The new regulations also make some minor changes to what the ESRs consider to be relevant activities and what licensees performing such activities must demonstrate in terms of sufficient economic substance in the UAE. For example, distribution businesses that were previously outside the scope of the regulations may now be caught.