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As a member of Organization for Economic Development and Cooperation (OECD), and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group, the UAE has committed to ensuring standards related to Base Erosion and Profit Shifting (BEPS) are implemented.  

During 2019, UAE introduced various Federal Legislation including:  

  • On 30 April 2019, UAE Cabinet of Ministers Resolution No. 31 Of 2019 was introduced concerning Economic Substance.
  • On 11 September 2019, Ministerial Decision No. 215 for the year 2019 providing guidance on Cabinet Decision No.31 of 2019 was introduced. 

The above legislations apply across the whole of the UAE, including all Free Zones and Financial Free Zones (such as the Dubai International Financial Centre). 

Economic Substance for Dubai International Financial Centre (DIFC) entities-Requirements

On 17th December 2019, the DIFC issued specific guidelines on Economic Substance Regulations applicable to all DIFC entities including private companies, public companies, partnerships (LLP, LP & GP), Foundationsnon – profit organization, and branches established in the DIFC.  

The Regulations apply to DIFC Licensees:

  • That earn income from one or more Relevant Activities. Relevant activities being banking, Insurance, Investment Fund management, Lease, Headquarters, Shipping, Holding, Intellectual Property, Distribution and Service Centre Businesses
  • For financial years commencing on or after 1 January 2019 

Please note it is important to analyze and conduct an impact assessment of the businesses activities in order to determine whether the business falls under the purview of Economic Substance Requirements in the UAE.  

As per the guidelines introduced by the DIFC, in order to determine whether a Relevant Activity is taking place, a substance over form approach should be followed.  This means looking beyond what is stated on the commercial license to what activity is being undertaken by the entity.  

Economic Substance Test for DIFC entities:

In order to meet the Economic Substance Test, a DIFC Licensee needs to demonstrate all three of the following conditions: 

  • Adequate employees, physical assets & expenditure in the UAE
  • Core Income Generating Activities (“CIGAs”) are undertaken in the UAE
  • Directed and managed in the UAE 

Next Steps for DIFC entities:

ALL DIFC entities are required to: 

  • Notify the DIFC Registrar of Companies (RoC) that they undertake a Relevant Activity 

Notification Deadline – 31 March 2020

  • Notification requirement applies to ALL DIFC entities (regardless of whether they conduct a Relevant Activity)  
  • All existing DIFC entities with financial year end 31 December 2019 must file the notification with the RoC on the DIFC Client Portal by 31 March 2020 

Return/ Report Deadline – 31 December 2020

  • Return/ Report filing requirement applies to DIFC Licensees that undertake a Relevant Activity    
  • DIFC Licensees that undertake a Relevant Activity with financial year end 31 December 2019 must submit the Return/ Report by 31 December 2020 i.e 12 months after the financial year end 

Economic Substance Regulation Submission in Freezones UAE- DIFC

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