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Untd A Emirates

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UAE Publishes New Resolution and Guidance on Economic Substance Regulations

The United Arab Emirates Ministry of Finance has updated its guidance on Economic Substance Regulations (ESR), including the publication of Cabinet of Ministers Resolution No. 57 of 10 August 2020 and Ministerial Decision No. 100 of 19 August 2020, which replace the Cabinet Resolution and Ministerial Decision published in 2019 for the introduction of the economic substance requirements in the UAE. Under the ESR, UAE onshore and free zone companies and certain other business forms (licensees) that carry out defined relevant activities are required to maintain and demonstrate an adequate economic presence in the UAE relative to the activities they undertake (the Economic Substance Test).

With the update, one of the main changes concerns licenses that are exempt from the Economic Substance Test, which includes any of the following entities registered in the UAE and which carry out a relevant activity:

  • an investment fund;
  • an entity that is tax resident in a jurisdiction other than the UAE;
  • an entity wholly owned by UAE residents and meets the following conditions:
    • the entity is not part of an MNE Group;
    • all of the entity's activities are only carried out in the UAE;
  • a licensee that is a branch of a foreign entity the relevant income of which is subject to tax in a jurisdiction other than the UAE.

Although exempted from the Economic Substance Test, exempted licensees must still submit an annual notification including proof of their exemption. A prior exemption for companies directly or indirectly 51% held by the UAE government is removed.

In addition to the exempted licensee changes, the notification requirements are also updated. This includes that every licensee and exempted licensee is required to submit a notification to their respective regulatory authorities setting out the following for each relevant financial year:

  • the nature of the relevant activity being carried out;
  • whether it generates relevant income;
  • the date of the end of its financial year; and
  • any other information as may be requested by the regulatory authority.

The notification must be submitted electronically on the Ministry of Finance Portal within six months from the end of the financial year. Licensees that have already submitted a notification directly to their regulatory authorities are required to re-submit a notification in accordance with the updated regulations.

Lastly, new penalty provisions are introduced, including the following penalties:

  • AED 20,000 for failing to submit the notification;
  • AED 50,000 for failing to submit the economic substance report or required documentation, or for failing to meet the economic substance test;
  • AED 400,000 for repeat violations in the immediately following year for failing to submit the economic substance report or required documentation, or for failing to meet the economic substance test; and
  • AED 50,000 for providing inaccurate information.

The ESR under the new Cabinet Resolution and Ministerial Decision are effective from the same date as the original, i.e., 1 January 2019.

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