TABLE OF CONTENTS
The Economic Substance Regulation of UAE ("ESR" or "the regulation") requires a Licensee to submit a Notification and an Annual Report with the Regulatory Authority within the prescribed timelines. Each financial year a Licensee needs to ascertain whether it had carried out a Relevant Activity and earned Income from such Relevant Activity. If there is no income earned from such Relevant Activity, a Licensee will be required to submit a Notification. However, it is not required to submit the Annual Report and therefore not required to demonstrate Economic Substance for the relevant financial year. If a Licensee carries out Relevant Activity and earned Relevant Income from such Relevant Activity, only then the Annual Report is required to be submitted.
An annual report is to be filed with the Regulatory Authority within twelve months from the end of the reportable financial year.
In the Annual report, a licensee would be required to demonstrate that it complies with the regulation and in the event, it has not, it might have to justify why it did not meet the requirements. Apart from the financial information, certain non-financial information is also required to be provided.
Let us examine some of the non-financial information and its relevance.
A licensee must demonstrate that the business was directed and managed from and within the UAE. Going forward, it will be required to document all the decisions, including strategic business decisions, which are taken in the meeting of directors. It requires at least one meeting of directors in the reportable period and the frequency of such meetings depends on the nature of the business conducted by the licensee. The documentation of the Minutes of the meetings (“MOM”) etc. would be required even if a Licensee is managed by an individual like a CEO or General Manager.
Directed and Managed in the UAE Test - How to satisfy the requirement?
Adequacy Test - How to satisfy the requirement?
A licensee must employ adequate resources to conduct business activities commensurate with the size of the business with a demonstration of adequacy of physical assets, human resources, and operational spending to conduct the business in the UAE. What a licensee needs to do to meet the adequacy substance requirement:
A licensee might be outsourcing all or a few of their processes to related/third parties. In such cases, the Regulation requires such related/third-party service providers to be located in the UAE. Moreover, a Licensee should have full supervision and complete control over such a service provider. Non-core processes could still be outsourced outside of UAE and meet the substance requirement
A licensee carrying out more than one Relevant Activity may be required to demonstrate substance for each of the Relevant Activity separately.
A licensee may be required to provide evidence of board meetings held in the UAE, adequacy of full-time employees and their qualification, nature, and type of expenses, details of outsourcing, etc.
The Licensee should start a review of the documents and processes and be ready with the Annual Report submission.
Apart from the ESR in UAE, there are 11 other jurisdictions that have implemented the regulation in 2019. The regulation stems from Action 5 of BEPS
Let us briefly examine ESR in a few other jurisdictions:
The licensee would also need to ensure adequate and appropriate internal policies & controls for its operation, compliance, corporate governance, & risk management. If an entity in Bahrain has not maintained adequate documentation or complied with the regulation, it must provide justification.
We are entering into an era of enhanced corporate compliances. Authorities in a few jurisdictions view non-compliance strictly. This could ultimately lead to suspension of the license or closure of the business. Moreover, the non-compliance could have a negative impact on the other businesses operated by the Ultimate Beneficial Owner. It is never too late to begin!
For more on ESR in UAE, check out the following articles:
A reminder to all businesses that concluded their financial year on 31 December 2021, please ensure to submit the Economic Substance Notification with the authorities before the due date to avoid penalties. The due date for the Economic Substance Notification submission is 30 June 2022.
You are required to conduct an Economic Substance Test for the financial year ended on 31 December 2021 to assess or verify if you have conducted any of the relevant activity as per the Economic Substance Regulation. Accordingly, you may be required to submit the Economic Substance Notification.
KPI has a dedicated team of experts in the UAE who can assist clients with Economic Substance Regulation compliance, assessment, and reporting.
Find out the key requirements for a Licensee to submit Economic Substance Regulation in UAE
Learn how the Economic Substance Regulations in UAE came into effect, the purpose, applicability & impact on your business.