Recently ESR has been introduced in UAE and it applies to natural and legal persons that include all foundations, free zone and onshore companies, NGOs, branches and partnerships which process one or more relevant activities given below:

  • Insurance companies;
  • Banking businesses;
  • Investment Fund Managingfirms;
  • Shipping businesses;
  • Lease-finance firms;
  • Headquarters businesses;
  • Intellectual property business;
  • Holding company firm; and
  • Service and Distribution centre entity.

Economic Substance Regulations and the UAE ESR Relevant Activities Guide that was issued lately by the Finance Ministry explained each of the activities.

For example, the Relevant Activities Guide for ESR assists that UAE businesses will be expected to apply “substance over form” process in the determination of whether to adopt any Relevant Activity without falling under the scope of Economic Substance Regulations. For determining this, Licensees must not just take into consideration the activities that are stated in the registration certificates or commercial licences but also analyze the activities that are executed within a financial period. Ministry of Finance states that a licensee doesn’t need to actively engage in one of the above categories of business for considering it as carrying on Relevant Activity. To understand further, let us take an example.The passive income receipt that fall sunder one of the above Relevant Activities is to be considered to carry on the activity.

What is needed under the Regulations Economic Substance?

Every Licensee who carries out the Relevant Activities should submit a notification with the concerned regulatory authority as laid out by the ESR.

Additionally, for each financial period, the Licensee who makes one or more Relevant Activities and makes income with Relevant Activity in UAE is needed to take and pass the “economic substance test”. Then the economic substance report should be submitted with the concerned regulatory authority in 12 months since the ending of relevant financial phase. The exemption is applicable for companies who are owned directly or indirectly at least 51% by Government of Emirates or a Federal or a Government authority or body of UAE.

The regulatory authority may differ depending on the kind of Relevant Activity and undertaking area. Every regulatory authority sets out reports forms that need filling and the procedure for the submission of such forms.

It will be good for any business to take appropriate action to comply, taking into consideration the current conditions at work because of COVID-19. According to a report published by a press, there has been confirmation from Undersecretary of the Ministry of Finance that the deadline for the notification to Ministry of Finance has been set on 30 June 2020. This is communicated to concerned regulatory authorities. He has said that to compliant with some regulators have decided to make it short.

If an entity fails to comply with the Regulations they shall end up in administrative penalties, a spontaneous information exchange with the Foreign Competent Authority as it is defined in the first article of the Regulations, and potentially it can be suspended, non-renewal or revocation of its registration.

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