UAE MoF releases updated Economic Substance notification and report templates (including guidance)

On 22 October, 2020, the Ministry of Finance (MoF) released initial versions of the Economic Substance (ES) notification and report templates on its webpage
(please refer to our previous alert on 27 October, 2020 where we first mentioned this).

On 5 November, 2020, the MoF released updated ES notification and report templates, including the much anticipated guidance, on its webpage. The templates appear to be documented versions of the MoF ES reporting portal, which is expected to be online on the first week of December 2020. The guidance is very helpful and provides clarification on how the ES notifications and reports are expected to be completed. For ease of reference, please find attached copies of the ES notification and report templates, as well as the guidance.

Key elements

The updated ES notification and report templates are conceptually not that different as opposed to the initial versions. However, certain inconsistencies have been rectified and some very useful clarifications have been provided. The key highlights of the updated templates and guidance notes are as follows:

  • Relevant activities: ‘Lease-Finance Business’ has been sub-categorised into ‘Leasing’ and ‘Financing’ which is more accurate. Similarly, ‘Distribution and Service Centre Business’ has also been sub-categorised into ‘Distribution’ and ‘Service Centre’.
  • Treatment of branches: Branches of a UAE head office/parent company will not be filing separate notifications (as per the previous notification filing requirements). Instead, the UAE head office/parent company will file a single consolidated notification (which will include details of all its UAE branches) as a single Licensee. The same also applies in relation to the report.
  • Financial information: Licensees are required to disclose a large amount of sensitive financial information such as total revenue, accounting profit/loss, net book value of tangible assets held in the UAE as well as copies of actual financial statements.  
  • Business operations: Similar to the above, Licensees are also required to provide a great deal of operational and financial data in relation to the specific Relevant Activity they undertake. For example, a ‘Lease-Finance Business (Financing)’ will have to report its income, operating expenses, average number of full time employees (which has to be calculated as per the formula provided in the guidance), who financing was provided to (i.e. group companies or third parties), the number of loans provided, the value of the loans provided, the value of loans that are issued to borrowers in the UAE, the value of loans that are issued to borrowers outside the UAE. This level of detail is more than was originally anticipated (i.e. this was not included in the initial ES regulations) and each Relevant Activity has its own set of specific questions.  
  • Exempted licensees: The guidance provides much needed clarity with regards to the documentary evidence that is required to be collected from Exempted Licensees (i.e. entities that are out of scope) to substantiate their exempt status. For example, a licensee that is a UAE branch of a foreign company whose income from a Relevant Activity is subject to tax in the jurisdiction of the head office should provide a copy of the tax return/assessment evidencing that the relevant income has been reported in the head office’s tax return. Likewise, a Licensee that is an ‘Investment Fund’ (which is exempt) should provide a copy of its statutory documents, a copy of the information memorandum and / or a copy of its investment fund license. For other Exempted Licensees the documents may be more burdensome and complex – but they are clear. 
  • Self-certification: As part of the ES report, Licensees need to confirm that they meet the ES tests.

Declaration and penalty: The ES report and guidance state that providing incorrect or false information will subject a Licensee to a penalty of AED 50,000. Incorrectly claiming an exemption from the ES regulations can result in the Licensee being deemed to have failed the ES tests. Accordingly, it is very important to make sure that all the responses in the ES notification and report are carefully considered as a single inaccurate statement (e.g. in relation to the number of board meetings held in the UAE) will potentially trigger a heavy financial penalty.  

Next steps

The MoF recently issued an update stating that the ES portal is scheduled to go live on the first week of December. It is important to note that moving forwards all ES notifications and reports must be submitted on the MoF portal – which is a very welcomed change as it is much more efficient and ensures consistency.

In terms of deadlines, the ES notification should be filed by Licensees within 6 months after their respective financial year end. Licensees that already submitted a notification (i.e. before 30 June 2020) will be required to resubmit their notification by 31 December 2020.

The deadline for Licensees to file their ES report is 12 months after their respective financial year end. This means that Licensees with a financial year of 1 January 2019 – 31 December 2019 should be submit their ES report by no later than 31 December 2020.

Given the fast approaching deadline, in order to ensure compliance we recommend that entities review the ES notification and report (along with the accompanying guidance) and begin considering whether they are impacted by the regulations, and if so, if they are able to demonstrate that they meet the substance requirements.

Especially, in order for Licensees to make accurate representations (either on the exempt status claim or the self-certification regarding the ES tests) and mitigate any repercussions, it is suggested that Licensees attain a sufficient level of comfort prior to making such representations. We would be pleased to perform to advise on the eligibility of exemptions or perform ES testing (health check).  

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