Economic Substance Regulations
The UAE has enacted Economic Substance legislation that applies in all UAE jurisdictions, including financial free zones such as the DIFC. In the DIFC, the ESR will be administered by the Registrar of Companies for all DIFC firms, including firms that are regulated by the DFSA.
Key points to note about ESR and how to prepare your business for it are set out below:
1. All DIFC entities are required to submit an economic substance notification on the DIFC Portal. However, the 31 March 2020 deadline previously advised is no longer applicable.
2. The UAE Ministry of Finance will issue a Relevant Activities Guide which should assist you in determining whether your business conducts a relevant activity and falls within the scope of the ESR. Once the Ministry issues the guide, the Registrar will make the economic substance notification available on the DIFC Portal and issue a communication to all DIFC entities about the notification process and deadline.
3. Your business may also be required to file an economic substance return, within 12 months of your financial year end, to demonstrate that your business meets the ESR requirements. Information relating to the return will be issued in the second half of this year.
The relevant UAE Economic Substance Legislation can be found at the Ministry of Finance Website.
Further information on the ESR can be found in the presentation and on the Ministry of Finance’s Economic Substance Regulations page.
While it is each DIFC entity’s responsibility to evaluate their obligations under the ESR and ensure compliance with the regulations, the DIFC will provide support by conducting outreach sessions and general enquiries can be directed to firstname.lastname@example.org or you can call us on +971 (0)4 362 2222.
Economic Substance FAQs
Q-What is Economic substance Regulations?
The UAE introduced the Economic Substance Regulations to honour the UAE’s 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 framework by the European Union (EU). The purpose of the Regulations is to ensure that UAE entities that undertake certain activities are not used to artificially inflate profits that are not commensurate with the economic activity undertaken in the UAE.
Q- When did Economic Substance Regulations come into force?
The UAE Economic Substance Regulations came into force on 30 April 2019, guidance on the regulations were issued on 11 September 2019, the regulatory authorities were identified in a Ministerial Resolution issued on 4 September 2019 and amendments were made to the regulations in Cabinet Decree No. 7 of 2020 issued on 19 January 2020. The Ministry of Finance is working with the OECD to further refine the scope and applicability of the UAE Economic Substance Regulations. Updates will be posted on this website and on the Ministry website.
Q- Who does the Economic Substance Regulations apply to?
The Regulations primarily apply to companies carrying out a ‘Relevant Activity’, i.e., banking, insurance, investment find management, lease-finance, headquarters, shipping, holding company, intellectual property, and distribution and service centers. Such companies must satisfy the Economic Substance Test as specified in the Regulations.
Q- Is this applicable to DIFC firms?
- The Regulations apply to DIFC entities and is administered by the Registrar of Companies in the DIFC.
- All UAE entities, whether they are located onshore or in a free-zone (including financial free-zones, such as the DIFC and the ADGM) are subject to the Regulations.
Q- What are the key compliance requirement of an entity carrying out Relevant Activities under the Regulations?
An entity carrying out Relevant Activities (the “Relevant Entity”) must:
- comply with the economic substance test (“Economic Substance Test”), and
- provide the requisite information to the Regulatory Authority under the Regulations (see question 6) .
Q- What do DIFC firms need to do?
ALL DIFC entities (including regulated firms) are required to:
- Notify the DIFC Registrar of Companies (RoC) that they undertake a Relevant Activity via a notification that will be available on the DIFC Portal
Only DIFC entities undertake a Relevant Activity, that are not exempt (see question 9) and earn income during a financial year commencing after 1 January 2019 are required to:
- meet economic substance requirements; and
- file an economic substance return on an annual basis.
Q- Who needs to notify and by when?
- Requirement to notify applies to all DIFC entities including regulated firms (regardless of whether they conduct a Relevant Activity)
- Notification must be filed with the RoC on the DIFC Client Portal during Quarter 2 2020, by the deadline communicated by the ROC in due course.
Q- Who is currently exempt from demonstrating substance?
- DIFC entities that are directly or indirectly owned 51% or more by the UAE government (Federal or Emirate level)
- DIFC entities that carry out a Relevant Activity but do not earn income from it
Q– What are the penalties under the Regulations?
Penalties for failure to Notify is
- Penalty of AED10, 000 AED50, 000
Penalty for failure to provide accurate or complete information
- Penalty of AED10, 000 AED50, 000.
Penalty for failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year
- Penalty of AED10, 000 - AED50, 000
- Information exchange with foreign competent authority of:
- 1. Parent company;
- 2. Ultimate parent company; and
- 3. Ultimate beneficial owner
Penalty for Second consecutive year of failure
- Information exchange (see above); and
- Penalty of AED100, 000 - AED300, 000; and
- Commercial license could be: suspended, withdrawn or not renewed
Q- Where can I find out more information about Economic Substance?
At this link on the Ministry of Finance website.