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Economic Substance update on the new compliance and administrative

25 March 2021
Annual compliance and key actions
 

The Economic Substance Regulations (ESR) broadly apply to all United Arab Emirates (UAE) onshore and free zone legal entities that carry out one or more of the Relevant Activities (RA) referred to as “licensees”.

Licensees must comply with the following two annual filing requirements:

  1. Notification: File a notification within 6 months from the end of the relevant financial year (FY) irrespective of whether exempt from the ESR or income was earned from the RA.
  2. Report: File a report within 12 months from the end of the relevant FY if earning income from a RA during the FY and not exempt from the ESR.

The below tables note the upcoming deadlines for a selection of FY ends:

FY end 

 Filing deadlines

  Notification Report
31-Mar-2020 31-Jan-2021* 31-Mar-2021
30-Jun-2020 31-Jan-2021* 30-Jun-2021
30-Sep-2020 31-Mar-2021 30-Sep-2021
31-Dec-2020 30-Jun-2021 31-Dec-2021
31-Mar-2021 30-Sep-2021 31-Mar-2022
30-Jun-2021 31-Dec-2021 30-Jun-2022

*Extended deadline.
Financial and non-financial penalties may apply for non-compliance.

 

Key actions
 

All entities are encouraged to, as early as possible, determine their upcoming ESR filing obligations for any completed FYs and take necessary steps to ensure filings are made within the applicable deadlines.

To understand the exact compliance requirements for the period, an entity will first need to assess whether its activities fall within the scope of the ESR RAs. Whilst the prior period RA position may serve as a useful indicator, we encourage all entities to review the activities and specific fact pattern on an annual basis to identify any changes in the RA position.

Licensees which are eligible and plan to claim one of the exemptions from the ESR in their upcoming notification should start gathering the relevant supporting documentation to evidence the position. Based on recent observations, we recommend all supporting documents are filed along with a copy translated into English (if not originally in English).

Licensees earning income from one or more RA should review their compliance
with the applicable ESR tests (Directed and Managed, Core Income Generating and Adequate). In addition to completing this review for completed FYs, we recommended this review is also undertaken within each FY so all necessary
steps can be taken within the period to address any potential areas of non-compliance.            

Penalties for non-compliance and the appeals process
 

With the majority of first year filings now completed, we are starting to see the National Assessing Authority issue administrative penalties to Licensees for non-compliance with the ESR.

Penalties for non-compliance with the ESR are wide ranging and can be significant. Financial penalties include the failure to:

  • Submit a notification (AED 20k);
  • Submit a report (AED 50k);
  • Provide accurate or complete information (AED 50k); and,
  • Demonstrate sufficient substance in the UAE (first failure is AED 50k and second consecutive instance of failure is AED 400k).

Non-financial penalties may include the exchange of information with foreign
authorities and suspension, revocation or non-renewal of the Licensee’s trade
licence. In each case, it is strongly recommended that entities fully investigate the basis from which penalties are issued and consideration is given to the right to appeal against penalties imposed, to the extent considered appropriate. Keeping a ‘clean record’ is considered particularly important in light of the potentially significant financial and non-financial penalties for consecutive non-compliance. Licensees may also consider the appeals process an opportunity to obtain further clarity from the authorities on specific areas that remain uncertain, based on a reading of the ESR and existing guidance.

It is also recommended that where there are instances of non-compliance with the ESR, entities should take the necessary steps as quickly as possible, to move the entity into a compliant position and prevent consecutive non-compliance.

In this regard, please do reach out to our team if support is required with any of the following areas:     

  • Drafting responses to enquiries from the relevant UAE authorities;
  • Navigating the appeals process; and
  • Advice in relation to areas of non-compliance and the necessary steps to move the entity into a compliant position.

Based on our experience to date and aside from late filings, we note that the majority of non-compliant entities are in this position as a result of a lack of knowledge of the ESR within the business and due to limited or no internal governance procedures in place to ensure compliance with the new requirements provided for in the ESR.

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