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 SAIF ZONE 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.
Relevant Activities for ESR in SAIF Zone
● Fund management
● Holding company
● 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.
Guidance: The meaning of “adequate” may vary from business to business. The ESR is not intended to impose requirements on companies to engage more employees or incur more expenses than are actually required to carry out a relevant activity. What is “adequate” depends on the nature and level of the relevant activity carried out by a company in the UAE.
This requirement may also be met if there is an adequate level of expenditure incurred on outsourcing employees and physical assets to third party service providers in the UAE. A third party service provider to whom part of a relevant activity is outsourced must have at all times adequate levels of i) activities, ii) employees, iii) expenditures and iv) premises in the UAE.
With regard to reporting, although the ESR does not prescribe a set period for the retention of records, it is advisable that a company keeps records and any relevant information evidencing compliance with the ESR for a period of six years after the end of each financial year. In assessing whether a company has met the Economic Substance Test, the regulatory authority can make its determination within that six-year period.
Holding companies: The ESR sets out reduced substance requirements for holding companies that do not carry out any other relevant activity and solely hold equity participation in other entities.
Intellectual property: A company that generates income from intellectual property assets that are considered “high risk” have additional reporting requirements.
Headquarter business: Determining whether a company carries out such activity depends on the services provided to other companies in the group and not on its position in the group.
Due-dates in filing the return in SAIF Zone
Entities that are governed by the Regulations will need to submit a notification by 30 June 2020, and where required prepare and submit to SAIF ZONE 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 SAIF Zone 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