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Recap
Licensees with a financial year-end (“FYE“) of 31 December 2019 were required to submit the economic substance notification pursuant to the Economic Substance Regulations (Cabinet Resolution No. 31 of 2019 or “ESR”) before 30 June 2020[1].
The submission of the economic substance notification is only the first step in complying with the ESR. The next, and most comprehensive, step is the submission of the economic substance report. This needs to be done by 31 December 2020.
Next: Economic substance report
Licensees with a 31 December 2019 FYE are required to submit the economic substance report by the end of this calendar year. The authorities have yet to clarify the format and procedure of submitting the report t. However, it is clear that Licensees will have to declare that they satisfy the Economic Substance Test (defined below).
To satisfy the Economic Substance Test a Licensee needs to:
- Carry out the Core Income Generating Activity (“CIGA“) in the UAE;
- Be directed and managed in the UAE in respect of that CIGA;
- Have adequate number of qualified full-time employees, expenditure and physical assets in relation to that activity OR level of expenditure on outsourcing to third party service provider in the UAE which has adequate expenditure, employees and physical assets in the UAE to carry out the Relevant Activity adequately;
- In case of outsourcing, the ability to monitor and control the carrying out of that CIGA by the service provider.
The Economic Substance Test is a self-assessment. The Regulator (being the authority that has issued the license) may not review the economic substance report and the Licensee’s declaration that it has met the Economic Substance Test before the next report is due. The Regulator has 6 years to review whether the Licensee has met the Economic Substance Test.
Consequences of non-compliance with the Economic Substance Test
When the Licensee does not pass the Economic Substance Test, the Regulator may impose penalties:
- A fine between AED 10,000 and AED 50,000 for the first year in which the Economic Substance Test is not met. In addition, pursuant to an international agreement, the non-compliance with the Economic Substance Test will be reported to a foreign competent authority of the country in which the parent, ultimate parent or ultimate beneficial owner is residing or the Licensee is incorporated (in case of a branch).
- A fine between AED 50,000 and AED 300,000 for the subsequent year in which the Licensee does not pass the Economic Substance Test.a. In addition, the Regulator may take other administrative actions, including suspension, revocation or non-renewal of the license.
What should Licensees do now?
Licensees with a 31 December 2019 FYE have less than 6 months to assess whether they have met the Economic Substance Test for 2019 and collect the necessary data to support this. These Licensees also have less than 6 months to make any amendments to the current arrangements to ensure that they pass the Economic Substance Test for the current reporting year (1 January 2020 to 31 December 2020).
Licensees with a different FYE have more time to make necessary amendments to pass the Economic Substance Test. If not done yet, they should first assess whether their activities are within the scope of the ESR. Please refer to our previous alert for more information on the activities that are within the scope of the ESR. View here.
For further information, please feel free to contact one of the lawyers below or your usual Baker McKenzie contact.
[1] At the end of June, the Ministry of Finance (“MoF“) published last minute changes to the FAQ on its website indicating that the deadline of 30 June only applies to companies with FYE 31 December 2019. A number of (free zone) authorities acknowledged this, but a few still required Licensees to comply with the deadline of 30 June, irrespective of the FYE. The MoF has not published the deadline for Licensees with a different FYE yet. However, it is expected the deadline will be 6 months after the end of the FYE. Licensees that have already submitted a notification, may have to resubmit the notification.
