Economic Substance Regulations

Economic Substance Regulations (“ESR”)

The UAE has enacted the Economic Substance Regulations (“ESR”) that applies in all UAE jurisdictions, including Free Zones. The UAE enacted the Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019) on 30 April 2019 and released Guidance (Ministerial Decision 215 of 2019) on the application of the Regulations on 11 September 2019.

In consultation with the Organization for Economic Co-operation and Development (“OECD”) and the European Union (“EU”), amendments to the ESR were made by Cabinet of Ministers Resolution No. (57) of 2020 (“Amended ESR”) issued on 10 August 2020, and updated Guidance was also issued on 10 August 2020 (Ministerial Decision No. (100) of 2020, “Amended Guidance”). The Amended Guidance also contains an updated Relevant Activities Guide at Schedule 1. The Amended ESR appoints the Federal Tax Authority as National Assessing Authority that will determine whether an entity meets the Economic Substance Test and issues penalties for contraventions of the Amended ESR.
In accordance with the Amended ESR and Amended Guidance, all IHC members are required to submit an Economic Substance Notification (“Notification”) and if they conduct one or more “Relevant Activities”, then  Economic Substance Report (“Report”) must be submitted too, electronically on the Ministry of Finance Portal (“MOF Portal”), even if they have already submitted a Notification to IHC.

The International Humanitarian City is the Regulatory Authority for the licenses issued under IHC Free Zone for the purposes of the UAE Economic Substance Regulations.

Key points to note about ESR and how to prepare your business for it are set out below:

  1. The UAE Ministry of Finance (“MOF”) has issued Ministerial Decision No. 100 of 2020 that includes a Relevant Activities Guide which should assist you in determining whether your business:
    • conducts a relevant activity and falls within the scope of the Amended ESR; and/or
    • is an Exempted Licensee under the Amended ESR.
  2. IHC Members that fall under the definition of Exempted Licensee under the Amended ESR and Amended Guidance, are still required to file a Notification but are not required to file a Report.
  3. The MOF Portal is scheduled to go live on the first week of December 2020. The IHC will inform clients when the MOF Portal is live. Templates for Notification and Report has been provided hereunder.
  4. The filing deadline for Notifications on the MOF Portal for IHC Members with a financial year ended on or before 30 June 2020, is 31 December 2020. Failure to file a Notification will result in a penalty of AED 20,000 under Article 13 of the Amended ESR.
  5. The filing deadline for Reports on the MOF Portal for relevant IHC Members with a financial year ended on or before 31 December 2019, is 31 December 2020. Failure to file a Report will result in a penalty of AED 50,000 under Article 14 of the Amended ESR. Exempted Licensees are not required to file a Report.

While it is each IHC Members’ responsibility to evaluate their obligations under the ESR, determine whether it conducts a Relevant Activity and ensure compliance with the regulations, the IHC will provide support in general enquiries can reach out to reg@ihc.ae or you can call us on +9714 5776308.