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As part of the UAE’s commitment as a member of the OECD Inclusive Framework and in response to an assessment of the UAE’s tax framework by the European Union (“EU”) Code of Conduct Group of Business Taxation, the UAE introduced a Resolution on the Economic
Substance (Cabinet of Ministers Resolution No.31 of 2019, the “Regulations”) on 30 April 2019. The Regulations require DMCC Authority entities that carry out any of the ‘Relevant Activities’ to maintain an adequate ‘Economic Presence’ in the UAE relative to the activities
they undertake and applies to financial years commencing on or from 1st January 2019.

As per Clause 4.2 of Ministerial Decision No 215 of 2019, the Licensee shall submit to the Regulatory Authority a Notification confirming;

a) Whether or not it carries out a Relevant Activity;

b) Whether or not all or any part of the Licensee’s gross income in relation to a Relevant Activity is subject to tax in a jurisdiction outside the UAE; 

c) The date of the end of its financial year.

Members are advised to refer to the flow chart on the DMCC’s website which shows the
steps under the ESR regulations for member companies. 

Relevant Activities for ESR in SAIF Zone

● Banking

● Insurance

● Fund management

● Lease-finance

● Headquarters

● Holding company

● Shipping

● Distribution and Service Centre

● Intellectual property (IP)

Guidance: If a company carries out a relevant activity, it should review the requirements applicable to such activity under the ESR. If it carries out more than one relevant activity, it should satisfy the Economic Substance Test for each activity.

Economic Substance Test

Companies in the UAE that carry out any of the above relevant activities must meet the substance and reporting requirements for each activity, in particular:

  • Carry out the Core Income-Generating Activity (CIGA) in the UAE;
  • Be directed and managed in the UAE;
  • Have an adequate level of qualified full-time employees, operational expenditure and physical assets present in the UAE to conduct the CIGA; and
  • Prepare and submit a compliance report to the regulatory authority which should include specific information1  in relation to compliance with the Economic Substance Test.

Due-dates in filing the return in DMCC

Entities that are governed by the Regulations will need to submit a notification by 30 June 2020, and where required prepare and submit to DMCC Authority an economic substance declaration within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019.) 

Penalties for Non-Compliance

A DMCC entity would be liable to an administrative penalty of AED10,000 – AED50,000 if it either fails to provide required information or knowingly provides inaccurate information. Penalties will also increase to between AED50,000 and AED300,000 in the subsequent year(s) of non-compliance.

Failure to comply may also lead to administrative action including potential suspension, revocation, or non-renewal of its registration.

What ALYA Auditors offers?

  • Consulting on ESR
  • Identify the qualifying entities for ESR compliances
  • Identify the qualifying business segments for ESR compliances
  • Report and advise on overall ESR readiness by the Entity
  • Ongoing ESR compliance
  • Secretarial services in connection with ESR record maintenance
  • ESR filing with the authorities in the proper /prescribed format
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