Dubai International Financial Centre (DIFC)
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Economic Substance Regulations

The Registrar of Companies (“Registrar”) is the Regulatory Authority designated in the DIFC for the purposes of the UAE Economic Substance Regulations (“ESR”).

The UAE enacted Economic Substance Regulations (Cabinet of MinistersResolution No. 31 of 2019) on 30 April 2019 and released Guidance (Ministerial Decision 215 of 2019) on the application of the Regulations on 11 September 2019. The Regulations and guidance applies in all UAE jurisdictions, including financial free zones such as the DIFC.

In consultation with the OECD and the EU, amendments to the ESR were made by Cabinet of Ministers Resolution No. (57) of 2020 (“Amended ESR”) issued on 10 August 2020, along with an updated Guidance(Ministerial Decision No. (100) of 2020, “Amended Guidance”, which contains an updated Relevant Activities Guide at Schedule 1). The Amended ESR appoints the Federal Tax Authority as National Assessing Authority that will determine whether an entity meets the Economic Substance Test and issues penalties for contraventions of the Amended ESR.

In accordance with the Amended ESR and Amended Guidance, all DIFC firms that conduct one or more “Relevant Activities” are required to submit an Economic Substance Notification (“Notification”) and/or an Economic Substance Report (“Report”), electronically on the Ministry of Finance Portal (“MOF Portal”), even if they have already filed a Notification on the DIFC Portal.

Please refer to the Notice from the Ministry of Finance in relation to ESR Filing Requirements and Deadlines on the MOF Portal.

Key points to note about ESR and how to prepare your business for it are set out below:

1. The relevant UAE Economic Substance Legislation can be found at the Ministry of Finance Website.

2. The UAE Ministry of Finance has issued Ministerial Decision No. 100 of 2020 that includes a Relevant Activities Guide which should assist you in determining whether your business:

  • conducts a relevant activity and falls within the scope of the Amended ESR; and/or
  • is an Exempted Licensee under the Amended ESR.

3. All UAE firms conducting a Relevant Activity in the UAE are required to file Notifications and Returns on the MOF Portal, regardless of their jurisdiction of incorporation or registeration in the UAE.

4. Firms that fall under the definition of Exempted Licensee under the Amended ESR and Amended Guidance, are still required to file a Notification on the MOF Portal but are not required to file a Report.

5.The MOF Portal is scheduled to go live on the first week of December 2020. The DIFC Registrar of Companies will inform clients when the MOF Portal is live.

  • The Notification template on the MOF Portal can be found at this link.
  • The Report template on the MOF Portal can be found at this link.

6. The filing deadline for Notifications on the MOF Portal for DIFC Firms with a financial year starting on or after 1 January 2019 and ending on or before 30 June 2020, is 31 December 2020. Failure to file a Notification will result in a penalty of AED 20,000 under Article 13 of the Amended ESR.

7. The filing deadline for Reports on the MOF Portal for relevant DIFC firms with a financial year starting on or after 1 January 2019 and ending on or before 31 December 2019, is 31 December 2020. Failure to file a Report will result in a penalty of AED 50,000 under Article 14 of the Amended ESR. Exempted Licensees are not required to file a Report.

While it is each DIFC entity’s responsibility to evaluate their obligations under the ESR, determine whether it conducts a Relevant Activity and ensure compliance with the regulations, the DIFC will provide support by conducting outreach sessions and general enquiries can be directed to info@difc.ae or you can call us on +971 (0)4 362 2222. The DIFC will not be able to provide specific advice relating to your entity, confirm whether it conducts a relevant activity, or whether it meets the economic substance test.

Economic Substance FAQs

Q1- What are the Economic Substance Regulations (“ESR”) and why did the UAE government enact them?

ESR have been introduced in countries with low or no corporate taxes, in order to comply with international initiatives to combat harmful tax practices including unlawful avoidance or evasion. ESR requires certain legal entities to demonstrate that they carry out substantial economic activities in these jurisdictions, in accordance with the Economic Substance Test (see Q7 below).

The UAE introduced the Economic Substance Regulations, applicable in free zones as well as on-shore, to honour its commitment as a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”), and in response to a review of the UAE tax reporting framework by the European Union (EU). The purpose of the Regulations is to ensure that UAE entities undertaking certain activities report actual profits that are commensurate with the economic activity undertaken within the UAE.

Q2- When did the ESR come into force?

The UAE Economic Substance Regulations (Cabinet of Ministers Resolution 31 of 2019) came into force on 30 April 2019, and subsequent guidance (Ministerial decision No. 215 of 2019) on the regulations was issued on 11 September 2019.

In consultation with the OECD and the EU, amendments were made to this legislation by Cabinet of Ministers Resolution No. (57) of 2020 (“Amended ESR”) issued on 10 August 2020, which repealed and replaced Cabinet of Ministers Resolution No. 31 of 2019. Updated Guidance was also issued on 10 August 2020 (Ministerial Decision No. (100) of 2020, “Amended Guidance”), which contains an updated Relevant Activities Guide at Schedule 1.

Any updates to the Economic Substance Legislation will be posted on this website and on the Ministry’s website.

Q3- Who does the Economic Substance Regulations apply to?

The Regulations apply to legal entities and unincorporated partnerships that carry out a ‘Relevant Activity’.

Q4- What are the Relevant Activities?

The Relevant Activities under the Economic Substance Regulations are:

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management Businesses
  • Lease-Finance Businesses
  • Headquarters Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service Centre Businesses

Please refer to the UAE Economic Substance Relevant Activities Guide issued by the Ministry of Finance for further information and explanation on each of the above Relevant Activities.

Q5 - Do the Economic Substance Regulations apply in the DIFC?

The ESR applies in all UAE jurisdictions, including financial free zones such as the DIFC. The DIFC Registrar of Companies is the designated Regulatory Authority for ESR in the DIFC.

Q6- Are the Economic Substance Regulations applicable to DIFC entities?

  • The Regulations apply everywhere in the UAE, including free zones and financial free zones. As such, all UAE entities that conduct a Relevant Activity, whether they are located onshore or in a free-zone are subject to the Regulations.
  • Accordingly, the Regulations apply to DIFC entities that conduct one or more Relevant Activities (refer to Q4 for a list of Relevant Activities). Therefore all DIFC entities (including regulated firms) that conduct a Relevant Activity, regardless of their legal type (eg Company, Partnership, Foundation or Non Profit Incorporated Organisation) are required to comply with the Regulations.

Q7- What is the Economic Substance Test?

The Economic Substance Test set out in the Amended ESR requires firms to demonstrate that:

  • the relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE; and
  • the DIFC entity and the Relevant Activity are being directed and managed in the UAE; and
  • the DIFC entity has adequate employees, premises and expenditure in the UAE.

Q8- What do DIFC entities need to do in the short term?

  • DIFC Firms that conduct a Relevant Activity and have a financial year starting on or after 1 January 2019 and ending on or before 30 June 2020, are required to file a Notification by 31 December 2020. Failure to file will result in a penalty of AED20,000 under Article 13 of the Amended ESR.
  • DIFC firms that conduct a Relevant Activity and have a financial year starting on or after 1 January 2019 and ending on or before 31 December 2019, are also required to file a Report on the MOF Portal (if applicable) by 31 December 2020. Failure to file will result in a penalty of AED50,000 under Article 14 of the Amended ESR. Exempted Licensees (see Q11) are not required to file a Report.
  • The MOF Portal is scheduled to go live on the first week of December 2020. The DIFC Registrar of Companies will inform clients when the MOF Portal is live.
  • The Notification template on the MOF Portal can be found at this link.
  • The Report template on the MOF Portal can be found at this link.

Q9- Which DIFC entities need to file a Notification and by when?

Under the Amended ESR, all entities that conduct a Relevant Activity (even if they are an Exempted Licensee (see Q11)) are required to file a Notification on the MOF Portal, within 6 months of the end of their Reportable Period (see Q13 for more information on Reportable Period). The first deadline for filing Notifications on the MOF Portal is 31 December 2020, for firms that have a financial year commencing on or after 1 January 2019 and ending on or before 30 June 2020.

DIFC entities that are in the process of liquidation (or under dissolution) are still required to file a Notification in respect of Reportable Periods ending on or before the completion of the liquidation / dissolution process.

Q10– Who is exempt from filing a Notification?

Only DIFC entities that have been dissolved, struck-off or liquidated prior to the deadline for submission of the Notification, are not required to file a Notification.

All other entities that conduct a Relevant Activity are required to file Economic Substance Notification, including Exempted Licensees and those that are currently in the process of dissolution / liquidation.

Q11- Who is exempt from filing a Report?

The following entities are considered to be “Exempt Licensees” under the Amended ESR and are not required to file a Report:

  1. Entities that are tax resident outside the UAE;
  2. Investment Funds;
  3. Entities that are wholly owned by UAE residents, that:
    1. are not part of a multinational group; and
    2. only carry out business activities in the UAE;
  4. A branch of a foreign entity whose relevant income is subject to corporate tax in a jurisdiction other than the UAE.

Exempted Licensees are not required to file a Report but are required to file a Notification, to confirm and substantiate their exempt status. Please refer to the Amended Guidance for more information on Exempt Licensees under the Amended ESR.

Q12- Can a single Notification and Report be filed for multiple entities?

UAE entities with UAE branches are able to file a single Notification and Report (if applicable), to report the relevant activities of itself and all of its UAE branches. All other entities are required to file Notifications and Reports on a stand-alone basis, irrespective of whether the entity is part of a consolidated group, for accounting purposes.

Q13- What is the Reportable Period referred to in the Notification?

The Reportable Period is the financial period commencing after 1 January 2019 to which the Notification relates. Entities are required to include the "start" and "end" date of the Reportable Period on the MOF Portal. Please refer to the examples below:

A DIFC entity incorporated on 12 February 2010 with a 31 December financial year end, would have the following Reportable Period:

  • Start date: 1 January 2019
  • End date: 31 December 2019

A DIFC entity incorporated on 1 July 2019 with a 31 March 2020 financial year end, would have the following Reportable Period:

  • Start date: 1 July 2019
  • End date: 31 March 2020

A DIFC entity incorporated on 1 June 2018 with a long financial year ending on 31 December 2019, would have the following Reportable Period:

  • Start date: 1 January 2020 (which is the first Reportable Period commencing on or after 1 January 2019)
  • End date: 31 December 2020

Q14- What are the key compliance requirements of an entity carrying out Relevant Activities under the Regulations?

An entity carrying out Relevant Activities must:

  • demonstrate economic substance in the DIFC in accordance with the economic substance test (see Q7);
  • file a Notification within 6 months of the end of its Reportable Period (the Notification template on the MOF Portal can be found at this link); and
  • file a Return containing all requisite information on an annual basis, within 12 months of the end of a relevant financial period. The Report template on the MOF Portal can be found at this link.

Q15- What are the penalties under the Regulations?

  • Failure to file a Notification – penalty of AED20,000
  • Failure to submit a Report and any information or documentation required in connection with the Report - penalty of AED50,000
  • Failure to meet Economic Substance Test for each relevant Financial Year - penalty of AED50, 000
  • Providing inaccurate information - penalty of AED50,000

The penalty for the second consecutive year of failure:

  • penalty of AED400, 000; and
  • any administrative action the National Assessing Authority may impose, including the suspension, withdrawal or non renewal of the entity’s commercial license.

With respect to the filing of the first Notifications and Reports on the MOF Portal under the Amended ESR Regulations, by the deadline of 31 December 2019, only DIFC entities that conduct a Relevant Activity and have a Reportable Period that ends:

  • on or before 30 June 2020 are subject to the fine for failure to file a Notification (even if the entity is an Exempted Licensee); and
  • on or before 31 December 2019, are subject to the fine for failure to file a Report.

Q16- Where can I find out more information about Economic Substance?

At the Ministry of Finance’s Economic Substance Regulations page, which includes additional FAQs and other useful background information.

In addition you may find the resources below helpful:

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