137 DAYS & COUNTING – HOW YOU CAN AVOID FINES FOR YOUR BUSINESS

Current Law:

DATE: SEPTEMBER 16, 2024 – IMPORTANT UPDATE: KEY AMENDMENTS TO THE ECONOMIC SUBSTANCE REGULATIONS (ESR)

The UAE Cabinet Decision No. (98) of 2024, published on September 16, 2024, introduced several key amendments to the Economic Substance Regulations. Key highlights include:

• Extended ESR applicability for financial years from 2019 to 2022.
• Waiver of penalties for exempt businesses up to December 31, 2022.
• Relief on penalties after December 31, 2022, for entities meeting national compliance obligations.

These updates provide crucial relief, particularly with the UAE’s corporate tax regime now in place.

We offer an ESR Assessment to evaluate each entity’s eligibility and compliance status. Secure your free consultation today.

Overview of Historical Law (No Longer in Effect): 

Did you know there are only 137 days until New Year’s Eve? Which means there are:

• Roughly only 95 working days left in the year (Or 760 working hours).
• Less lunch breaks, makes around 665 hours.
• Less coffee breaks (maybe this number is a little low) leaves 618 hours.

That is not a long time to go. If you reported that you conducted a Relevant Activity for your Economic Substance filing, that means you should have already started working on your Economic Substance Return (ESR) report. 

Have you ticked that Economic Substance notification box to state that you do not perform a Relevant Activity? Your company could be at risk depending on the business activity and how your business operates; you may still need to comply with ESR filing. If your UAE company is transacting with a related company outside of the UAE it will may well be performing a Relevant Activity and you will need to prepare an ESR report for lodgment by 31 December 2020. Every hour counts and we recommend on getting in touch and starting now to prevent any potential fines. 

UAE ECONOMIC SUBSTANCE RECAP & NEXT STEPS – (No Longer in Effect)

STEP 1

All free zone, mainland, and offshore entities – referred to as a Licensee Entity that have a financial year-end (FYE) of 31 December 2019, were to comply and submit the Economic Substance Notification as specified in the Economic Substance Regulations (Cabinet Resolution No. 31 of 2019 or “ESR“) before its deadline. Almost all regulatory authorities set the deadline for Economic Substance Notification to be completed and submitted around 30 June 2020.

STEP 2

Since step 1 was completed – submission of Economic Substance Notification of the Licensee Entity should ensure they are currently working towards completing the second step of Economic Substance Reporting (ESR). Step 2 is the most important and comprehensive requirement for complying with ESR and meeting the deadline of 31 December 2020. 

ECONOMIC SUBSTANCE REPORT – (No Longer in Effect)

A Licensee Entity that has a FYE as 31 December 2019 must complete and submit the Economic Substance Report no later than the end of this calendar year. Ministry of Finance (MOF) authorities are yet to release the format and processes for the report. In the meantime, it is sure that a Licensee Entity must declare and satisfy the Economic Substance Test (we have set out below). For the Licensee Entity to meet the Economic Substance Test, they will need to:

• Carry out the Core Income Generated Activity (CIGA) in the UAE.
• Ensure the company is directed and managed in the UAE in respect of that CIGA.
• Make certain that there are an adequate number of qualified full-time employees, expenditure, and physical assets in relation to that activity, or the company maintains a certain level of expenditure on outsourcing to third party service providers in the UAE that have adequate expenditure, employees, and physical assets in the UAE to conduct and carry out the Relevant Activity adequately.
• In the scenario where there is outsourcing, the company must have the capacity to monitor and control the conduct of that CIGA that is being completed by the service provider.

WHAT HAPPENS IF A LICENSEE ENTITY DOES NOT COMPLY WITH ECONOMIC SUBSTANCE TEST? – (No Longer in Effect)

Should the Licensee Entity not pass the Economic Substance Test, the concerned Regulator might impose penalties such as:

FINES

• Within the first year a fine may be issued. The fine can range from AED 10,000 to AED 50,000 where the Economic Substance Test is not met. Furthermore, in relation to an international agreement, where the Licensee Entity has been non-compliant with the Economic Substance Test, they may be reported to the foreign competent authority of the country in which the parent, ultimate parent or Ultimate Beneficial Owner (UBO) is residing or the Licensee Entity is incorporated (applicable to a branch company).
• The subsequent year where the Licensee Entity has not passed the Economic Substance Test a further fine will apply. This fine can range between AED 50,000 and AED 300,000. Also, the Regulator can take other actions which may include suspension, termination, or non-renewal of the license. 

WHAT TO DO NEXT?

Time is of the essence and 31 December 2020 is fast approaching. If a Licensee Entity has not started preparing a timeline and working towards compliance with ESR regulations, we strongly recommend engaging services from experts to get started. The company will have less than 5 months to assess whether they have met the Economic Substance Test for 2019. We are assisting companies just like yours on populating data to support Economic Substance. We have a team of experts who are assisting companies on making amendments to their current arrangements to ensure they will pass the Economic Substance Test. Already we are identifying gaps and suggesting a road map to ensure compliance and identifying areas where outsourcing can resolve any potential issues for the current reporting year of 1 January to 31 December 2020. What to do next? Book your ESR consultation with Creation Business Consultants today email  [email protected] or call +971 4 878 6240.