During the month of August 2020, the UAE government issued Cabinet Decision 57 of 2020 and Ministerial Decision 100 of 2020 concerning the economic substance requirements (Regulations). According to the Regulations, all companies in UAE that carry out relevant activities in the UAE are required to file a notification with the Ministry of Finance.
In November 2020, the UAE government clarified that the companies that have already submitted the notification with the regulatory authorities in June 2020 must re-file the notification on the website portal of the Ministry of Finance by 31 December 2020. Non-filing of the notification within the given deadline will invite a penalty of AED 20,000.
Below, we have answered some of the most common questions relating to the notification:
1. What are relevant activities?
The relevant activities include the following businesses:
- Investment fund management
- Lease and finance
- Holding company
- Intellectual property
- Distribution and service centre
An entity should determine if it carries out any relevant activity by using the approach of “substance over form”. An entity may be carrying out a relevant activity even when the activity is not mentioned on its trade license. Also, an entity may carry out more than one relevant activity.
The income arising from a relevant activity is the relevant income of the entity.
2. Who must file?
The notification must be filed by any entity registered in the UAE and carrying out any of the activities listed in point 1 above. The entity may be:
- A limited liability company
- A private shareholding company
- A public shareholding company
- A joint venture company
- A partnership
- An offshore company in UAE
- A free zone company
- An investment fund
- A tax resident in a jurisdiction outside the UAE.
- An entity wholly owned by the UAE residents carrying all its activities in the UAE, and which is not a part of the MNE (Multinational Entity) group.
- A company or a partnership that is a branch of a foreign entity, and whose income from the relevant activity is taxable outside the UAE.
3. Who are exempted?
The following do not have to file the notification:
- An individual
- A sole proprietorship
- A trust
- A foundation
- Any entity that has not earned income from any relevant activity during a financial year
4. Does a branch office have to file separately?
A branch registered in the UAE does not have to separately file the notification. The head office registered in the UAE must file a combined notification, reporting the relevant activities of itself and all its branches.
A UAE branch of a foreign entity that carries out a relevant activity must file the notification. However, a UAE branch of a foreign entity does not have to file the notification, if its income from the relevant activities is taxable outside the UAE.
A UAE entity carrying out a relevant activity through a branch office registered outside the UAE does not have to include in the notification the details of the branch office, if the income earned by the branch office from relevant activity is taxable outside the UAE.
5. What information must be filed?
The notification must contain the following information:
- Details of the nature of the relevant activity.
- Details of the income generated from the relevant activity.
- End date of the financial year.
It is possible that the Ministry of Finance may ask additional information from the entity. In this case, the entity must provide the additional information.
As per the Regulations, a notification must be submitted within six (6) months from the end of an entity’s financial year. However, the clarification states that a notification that is due for filing must be submitted on the website of the Ministry of Finance by 31 December 2020. For instance, if the financial year of an entity ended on 31 March 2020, then the notification had to be submitted by 30 September 2020. This notification must now be submitted on the website of the Ministry of Finance by 31 December 2020.
All entities including offshore companies in UAE that have already submitted the notification with a regulatory authority must re-submit the notification on the website of the Ministry of Finance by 31 December 2020.
7. ESR determination during Covid-19?
The UAE government issued an advisory stating that the UAE will consider the impact of Covid-19 while determining whether an entity has demonstrated sufficient economic substance in the UAE. These considerations will only apply to those substance requirements that are directly affected by Covid-19 (travel restrictions, self-isolation situations or quarantine requirements).
Further, the UAE government advised that entities should appoint alternate directors in the UAE to attend meetings in the UAE. This will address any short-term difficulties arising from the implementation of the Covid-19 measures.
8. Additional Information?
The Ministry of Finance will continue to provide additional information regarding its website.
InZone offers a service to prepare and submit ESR notifications on behalf of the entities affected by the Regulations. We carry out an assessment and ensure that the ESR notification of your company is duly filled and timely submitted. If you wish to carry out an assessment and / or submit your ESR notification, do contact us.