The UAE Economic Substance Regulations (Ministerial Decision File Download (mof.gov.ae)) (the “ESR”) states that all businesses in the UAE conducting ‘Relevant Activities’ as clearly defined within the ESR, must fulfil their obligations within the stipulated timelines. Failure to comply with these regulations may result in penalties and fines.
The ESR also notes that businesses that have conducted a ‘Relevant Activity’ in the preceding financial year are required to file a notification with the UAE Ministry of Finance within 6 months after the end of their financial year. Additionally, businesses that have generated revenue from a ‘Relevant Activity’ are obligated to file a detailed report within 12 months of the end of the financial year.
As an example, Company A, with a financial year end of 31 December 2022, must assess whether it conducted a ‘Relevant Activity’ during 2022 and submit a notification by 30 June 2023 if applicable. Furthermore, if Company A has generated income from the ‘Relevant Activity’, a report must be filed with the Ministry of Finance by 31 December 2023.
To assist businesses in determining if they fall within the scope of the ESR, the UAE Ministry of Finance has published a helpful flowchart. This flowchart can be downloaded from the Ministry's official website (File Download (mof.gov.ae)) and provides a step-by-step guide to assess whether a business has undertaken any ‘Relevant Activity’ during the year 2022.
To streamline the process, the Ministry of Finance has recently updated their UAE Pass portal, and businesses are now required to process their ESR applications using this. UAE Pass is available to all residents of the UAE, and every entity registered with the Ministry of Finance for ESR submissions must be linked with a verified UAE Pass account.
It is important to note that Economic Substance is a broad concept, and even if a company's licensed activities do not specifically align with the list of ‘Relevant Activities’, it may still be subject to the ESR. Intra-group trading or intra-group loans, for example, may bring a company within the scope of ESR, regardless of the nature of its activities. This highlights the importance of conducting a careful analysis of a company's activities. Therefore, businesses are encouraged to thoroughly evaluate their operations and consult with legal professionals if they are unsure about their obligations.
The concept of Economic Substance Regulations has been well established, and the Ministry of Finance has started imposing penalties for non-compliance. Therefore, as a prudent approach, we strongly recommend our clients to conduct a thorough assessment and file a notification, even if it may not appear mandatory at first glance. Failure to comply with the ESR requirements can result in severe penalties. Businesses that fail to submit the required notification on time will face a penalty of AED 20,000. Additionally, a further fine of AED 50,000 will be imposed for failure to file a report.
For further information and guidance on complying with the UAE Economic Substance Regulations, businesses are advised to visit the official website of the UAE Ministry of Finance or seek professional advice from qualified experts.
With our extensive expertise, comprehensive understanding of regulatory compliance, and a dedicated team experienced in navigating the ESR intricacies, we are well placed to support you. We can assist with preparing and submitting the notification along with the corresponding Board resolution that considers the assessment and the outcome. For immediate support and compliance guidance, please reach out to our team.
This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained within this article without obtaining specific professional advice. Please contact Equiom Group to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.