UAE Economic Substance update
Late notification filing and next steps
This alert provides insights on the latest Economic Substance updates in the UAE.
The deadline to submit notifications has passed – what is next?
The United Arab Emirates (UAE) Economic Substance (ES) Regulations prescribe the following two compliance/reporting requirements:
- ES notification: UAE licensees are required to notify the competent regulatory authority if they conducted a Relevant Activity (RA) during reportable period.
- ES return: UAE licensees conducting a RA are required to submit a report detailing further information in relation to such RA demonstrating that the ES tests are met during the reportable period within a period of twelve months after the end of each financial year.
All entities/licensees with a financial year (FY) commencing on or after 1 January 2019 and ending on or before 31 December 2019 should have notified their relevant regulatory authority by 30 June 2020 if they conducted a RA in the period.
We expect the statutory notification deadline for entities with a different FY end to be communicated in due course.
Comfort on the RA position
The notification and the position taken is an important and decisive step in the compliance process as it will determine the future requirements. Licensees not carrying out a RA have no further compliance requirements whereas licensees carrying out a RA will need to meet the ES tests (see below) and will be subject to the compliance requirement set out under bullet point number 2 mentioned above.
It is the obligation of each licensee to assess whether or not it carried out a RA. Incorrect RA classifications would result in non-compliance and trigger penalties. Therefore, licensees are advised to have a high level of comfort with the position taken, especially when they claimed not to carry out a RA and have not performed a proper entity classification exercise.
For licensees that do currently not have this level of comfort on the RA position taken, it is recommended that they clarify and/or justify the position as soon as possible and take actions on a timely basis to mitigate any challenges and/or penalties.
ES tests and ES return
As set out above, licensees carrying out a RA are obliged to meet ES tests, and file the ES return no later than 12 months after the financial year end.
The authorities have not yet issued the report template. However, licensees will
need to demonstrate that they meet the ES tests as follows:
- The Directed and Managed Test: The ES rules state that the board
of directors meets in the UAE at an adequate frequency having regard to the amount of decision making required at that level. Accordingly, the frequency would depend on the nature, scale and complexity of the RA the licensee conducts.
- The Core Income Generating Activities (CIGA) Test: According to the rules, the CIGA must be performed in the UAE. What constitutes the CIGAs of a particular RA is a fact sensitive issue which can vary from business to business.
- The Adequate Test: This test requires the company to have an adequate number of qualified employees, adequate expenditure incurred in the UAE and adequate physical assets in UAE. What is considered “adequate” for a company will depend on the nature, scale and complexity of the business of the in-scope entity.
As seen from the above, the tests purposely do not provide a bright line test and the assessment would have to take into account the specifics of the particular business involved.
Licensees that do not comply with the ES tests for FY19, should take immediate action to mitigate consecutive non-compliance. To the extent that there are any red-flags, it is recommend to perform a ES health check and take action immediately.