Economic Substance Regulations (ESR) were introduced in the UAE in March 2019 by virtue of Cabinet Resolution No. 31 of 2019 (Cabinet Resolution). The ESR apply to all companies based in the UAE (onshore and free zones), including branches and apply to financial years starting on or after 1 January 2019.

The UAE government has delegated the responsibility to regulate and administer the ESR to the various onshore and free zone authorities (such as the Department of Economic Development and Ministry of Economy in the relevant emirates for onshore entities and the respective free zone authorities for entities located in the free zones in the UAE) (Regulators). The relevant Regulators are expected to issue detailed guidance and procedures for their Licensees to comply with the ESR. When a Licensee is carrying out a Relevant Activity (as defined in the Cabinet Resolution and the guidance that the UAE Ministry of Finance (MoF) issued by virtue of the Ministerial Decision No. 215 of 2019: Directives for the implementation of the Economic Substance Regulations) it is required to notify and submit the report to its Regulator. We refer to our previous alerts for the Relevant Activities that are within the scope of the ESR and the specific guidance on ESR published by the MoF.

The deadline, format and process for submitting the notification should be set by the Regulator. Although there is no official communication on this point, it appears that Regulators have been instructed by the MoF to request its Licensees to submit the notification by 30 June 2020. Some Regulators have set earlier deadlines, for example the Dubai Airport Free Zone Authority (initially on 3 May 2020 and recently extended to 31 May 2020), Dubai Aviation City Corporation at Dubai World Central (on 7 June 2020) and Dubai International Financial Centre (on 12 June 2020). There are still a number of Regulators that have not published an official date or procedure.

Based on the template prepared by the MoF, the following information should at least be included in the notification:The type of Relevant Activity conducted by the Licensee (if any);

  • Whether income is earned from this activity and whether this income has been subject to tax outside the UAE; and
  • Whether the Licensee is a tax resident outside the UAE, and if so where.

Non-compliance with the obligation to file a notification before the deadline or filing of an incorrect notification is subject to penalties ranging from AED 10,000 to AED 50,000.

For further information, please feel free to contact one of the lawyers below or your usual Baker McKenzie contact. 

Author

Reggie Mezu is a Senior Special Counsel in Baker McKenzie Habib Al Mulla, based in Dubai. He has practiced tax for nearly 30 years in the Middle East, Africa and Europe, including in the UAE for 15 years. Reggie regularly advises clients on tax planning, corporate structuring, cross-border transactions, double tax treaties, reform and development of fiscal frameworks, general advice, and most recently, the new value added tax (VAT) regime in the Gulf region.

Author

Bastiaan Moossdorff is a Senior VAT Adviser in Baker McKenzie Habib Al Mulla, based in Dubai. He specializes in indirect tax and has practiced indirect tax for more than 7 years in the Netherlands, the UK, the UAE and the KSA. Bastiaan has multi-jurisdictional and multi-disciplinary academic qualifications in law, accountancy and taxation.

Author

Rony Eid is a counsel in Baker McKenzie Habib Al Mulla, based in Dubai. With over 18 years' experience in the Middle East (including nine years in the UAE), he specializes in corporate and commercial transactions, foreign direct investments, mergers and acquisitions, reorganization of companies and regulatory matters. Rony also advises on the incorporation and structuring of companies in the UAE including within Dubai's free zones.

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