Upcoming Economic Substance compliance and filing obligations

26 May 2022 - This note provides an overview of the upcoming Economic Substance (ES) compliance and filing obligations in the United Arab Emirates (UAE).

Reminder of ESR filing requirements

The United Arab Emirates (UAE) Economic Substance Regulations (ESR) require certain domestic and free zone legal entities that conduct one or more of nine relevant activities (RA) (referred to as “licensees”) to comply with annual filing
requirements, as follows:

• A notification must be submitted within six months from the end of the fiscal year (FY) declaring that the entity undertakes RA, irrespective of whether the licensee is exempt from the ESR or income was earned from RA.
• A report detailing certain business information must be submitted within 12 months from the end of the FY, but only if income was earned in the period from RA and the licensee was not exempt from the ESR.

The below table outlines the upcoming deadlines for a selection of FY ends:

All legal entities are encouraged to determine their upcoming ESR filing obligations as soon as possible for any completed FYs and take necessary steps to ensure filings are made within the applicable deadlines and all necessary supporting documentation is available at the time of the filing. 

Penalties for noncompliance with the ESR include financial penalties for the failure to submit a notification (AED 20,000), submit a report (AED 50,000), provide accurate or complete information (AED 50,000), and demonstrate sufficient economic substance in the UAE (first failure is AED 50,000 and second consecutive instance of failure is AED 400,000). Nonfinancial penalties include information exchanges with certain foreign authorities. The Federal Tax Authority (FTA) has begun to initiate audits.

Key ESR considerations before the end of the Financial Year

All legal entities should consider the following ESR matters and ensure action is taken, where relevant, before the end of a FY:

• The entity should assess whether it conducted and generated income from any of the nine RAs during the period. This step is important as it will help identify an entity’s specific ESR compliance requirements for the FY.
• Entities earning income from RA during the FY should review their compliance with the applicable ESR tests, i.e., directed and managed test, core income generating activities (CIGA) test, and adequate test.
• Following the above review, entities should take all necessary steps before the end of the FY to address any potential areas of noncompliance (i.e., ensure compliance with all applicable ESR tests).
• In relation to the CIGA test, entities should ensure control and supervision over any outsourcing arrangements can be demonstrated in the FY, e.g., through contractual agreements or correspondence.
• In light of the FTA ESR audits, Licensees should collate relevant supporting documents relating to their ESR compliance obligations and to keep on record. If selected for an audit, Licensees have a short turnaround period of 5 working days to provide the FTA with all requested documentation (i.e., evidencing that the ESR tests are met). 

The purpose of the above (non-exhaustive) guidance is to provide entities with an opportunity to take any necessary actions to comply with the ESR before it is too late. 

The Ministry of Finance (MoF) has a designated homepage for ESR. The legislation, guidance, notification and report templates as well as a link to the ESR Portal may be accessed via this link.   

Deloitte has developed the first of its kind ES guide with a view to support UAE businesses with their reporting obligations. If you are interested in the guide, a sample version is available on the following link. Alternatively, if you would like to purchase a copy of the guide, please get in touch with us on the following email ID: Deloittetaxme@deloitte.com.