Background

Economic Substance Requirements are a set of rules demanding corporate bodies operating in jurisdictions with low or no corporate taxes to prove a certain degree of substance allowing them to carry out their respective commercial activity, rather than simply having a presence for the purpose of tax avoidance. The United Arab Emirates have issued corresponding requirements in 2019.

Relevant Activities

The Economic Substance Requirements apply to various kinds of corporate vehicles in the UAE that carry out one of the following business activities:

Banking

Insurance

Fund Management

Finance and Leasing

Intellectual Property

Holding Company

Distribution and Service Centre

Shipping

Economic Substance Test

Entities operating in one of the Relevant Activities must pass an economic substance test which includes the following aspects:

 

  • Retrieve income from Core Income Generating Activities (CIGA) in the UAE;
  • Be directed and managed in the UAE;
  • Have an adequate number of qualified full-time employees in the UAE;
  • Have an adequate operating expenditure incurred in the UAE; and
  • Have adequate physical assets in the UAE.

Reporting Requirements

Corporate vehicles that carry out relevant activities must report certain information:

 

  • Whether or not a relevant activity is carried out;
  • The type of relevant activity and amount of income related thereto;
  • The location of the activity (and if applicable, property or equipment used to conduct the Relevant Activity);
  • The number of employees and their qualifications; and
  • A declaration by the respective corporative vehicle stating that it passed the economic substance test.

Sanctions

Failure to notify the regulatory authority, submit annual reports or provide information on request or the provision of inaccurate information may be sanctioned with a penalty ranging from AED 10,000-50,000.

Failure to meet the Economic Substance Test will result in penalties ranging from AED 10,000-50,000 in the first instance and the relevant regulatory authority will issue a notice specifying the actions to be taken. If the regulatory authority determines that an entity is not meeting the Economic Substance Test repeatedly, a penalty between AED 50,000-300,000 may be imposed. The authority may also suspend, revoke or deny the renewal of the company’s license.

GERMELA LAW LLP – Health Check & Compliance Package

GERMELA LAW LLP will assist you in complying with the Economic Substance Requirements by carrying out the following steps:

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ESR requirements

We will review your commercial activities against ESR requirements.

Compliance Check

If you are carrying out a relevant commercial activity under the ESR, we will review your economic substance & commercial license structure and suggest measures to achieve compliance.

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Preparation & filing of ESR Reporting

We will review ESR filing deadlines, prepare & file all relevant ESR documents & reports.

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