Upcoming Economic Substance compliance and filing obligations in the UAE

Reminder of ESR filing requirements

All UAE onshore and free zone companies and certain other business forms that conduct one or more of the nine ESR Relevant Activities (RA) during a FY (referred to as Licensees), must consider their annual filing requirements.

1. Notification: To be submitted within 6 months of the FY end, irrespective of whether the Licensee is exempt from the ESR or income was earned from the RA(s).
2. Report: To be submitted within 12 months of the FY end, if income was earned in the period from the RA(s) and the Licensee was not exempt.

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

All entities are encouraged to, as soon as possible, determine their upcoming ESR filing obligations 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 non-compliance with the ESR include financial penalties for the failure to submit a notification (AED 20,000), failure to submit an ES report (AED 50,000), failure to provide accurate or complete information (AED 50,000), and failure to demonstrate sufficient ES in the UAE (first failure is AED 50,000 and second consecutive instance of failure is AED 400,000). Non-financial penalties include deemed failure to demonstrate substance and information exchanges
with certain foreign authorities. Please note that the Federal Tax Authority
has initiated audits.

Key ESR considerations before the end of the FY

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

• Assess whether the entity 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 UAE ESR compliance requirements for the FY.
• Licensees earning income from an RA(s) during the FY should review their compliance with the applicable ESR tests, i.e., Directed and Managed, Core Income Generating Activities (CIGAs) 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 non-compliance (i.e., ensure it is compliant with all applicable ESR tests).
• Where an entity’s normal operations and in particular, ability to comply with the Directed and Managed test was impacted by the COVID-19 pandemic during the FY, the entity should consider appointing alternate directors in the UAE to attend meetings locally as a temporary measure. 
• In relation to the CIGA test, ensure control and supervision over any outsourcing arrangements can be demonstrated in the FY, e.g. through contractual agreements or correspondence.

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