On 30th April 2019, Cabinet of Ministers’ Resolution No.31 of 2019 was passed concerning Economic Substance Regulations (“ESRs”) in the UAE. Our November 2019 Regulatory Insight article provided details of what the ESRs are, why they have been introduced and to which firms the ESRs apply. Click here to view that article.
Stage 1 - Economic Substance Notification
Who is required to make the Economic Substance Notification in the DIFC?
The Economic Substance Notification (“ESN”) is mandatory and must be filed by all legal entities in the DIFC through the DIFC Client Portal, regardless of whether they conduct a Relevant Activity or not and includes financial and non-financial entities. If an entity is part of a Group then each entity of the Group must file a separate notification and this also applies to branches in DIFC.
Firms may not have all Relevant Activities listed on their commercial licence but must look beyond the licensed activity to identify if income is generated from a Relevant Activity.
Entities in the DIFC who are exempted from the requirement to file the notification
Entities which are dissolved, liquidated, or struck off before 30th June 2020.
Note: If a company is under liquidation or under dissolution, they will still be required to complete the notification which will be completed and submitted by the liquidator.
Deadline for Economic Substance Notification to the DIFC
30th June 2020
Stage 2 - Economic Substance Return
All entities that earn income from one or more Relevant Activities during the relevant financial year, either directly or following some form of collaboration with a Group entity, are required to submit an Economic Substance Return.
Information relating to the return will be issued in the second half of 2020 by Ministry of Finance, UAE.
Timelines of notification, reportable period and filing of returns
The reportable period for entities is the financial year commencing on or after 1st Jan 2019.
Entities with 1st Jan 2019 - 31st Dec 2019 financial year
Reportable period: 1st Jan 2019 - 31st Dec 2019
Notification date to the DIFC: 30th June 2020
Return due date: 31st Dec 2020
Entities with 1st April 2019 - 31st March 2020 financial year
Reportable period: 1st April 2019 - 31 March 2020
Notification date: 30th June 2020
Return date: 31st March 2021
Entities with 1st July 2019 - 30th June 2020 financial year
Reportable period: 1st July 2019 - 30th June 2020
Notification date: 30th June 2020
Return date: 30th June 2021
All entities established before 1st Jan 2019 - will have a reportable period of 12 months.
New entities established after 1st Jan 2019 - can choose to have an 18-month reportable period as the first financial year.
Entities which are exempt from the requirement to demonstrate Economic Substance
- Entities that are directly or indirectly owned 51% or more by the UAE government
- Entities which conduct Relevant Activity but derive no income from such an activity
Penalties and fines for non-compliance
- Failure to notify the registrar: AED 10,000 - AED 50,000
- Providing inaccurate and incomplete information: AED 10,000 - AED 50,000
- Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year.
1. Penalty for first year:
(a) AED10, 000 - AED50, 000; and
(b) information exchange with foreign competent authority of:
(i) Parent company;
(ii) Ultimate parent company; and
(iii) Ultimate beneficial owner
2. Penalty for second consecutive year of failure:
(a) information exchange (see 1(b) above);
(b) penalty of AED100,000 - AED 300,000; and commercial license could be: suspended, withdrawn or not renewed.
What should you do next?
Economic Substance Tests
Entities who are undertaking Relevant Activities will need to prove that in relation to Relevant Activities they have ‘Economic Substance’ which means that they:
- Conduct Core Income Generating Activities (or “CIGA”) in the country
- Are directed and managed in the UAE in relation to that activity (guidance says that at least one board meeting in the country)
- Have an adequate number of qualified full-time employees in relation to that activity who are physically present in the UAE
- Have premises and adequate level of expenditure in the country
Refer to the relevant guidance issued by the Ministry of Finance for further detail in relation to the above.
If you are unclear on the steps your firm needs to take to comply, contact our team in the DIFC for support.