Upcoming Economic Substance compliance and filing obligations

Reminder of ESR filing requirements

The United Arab Emirates (UAE) Economic Substance Regulations (ESR) require certain domestic and free zone legal entities that conduct one or more of nine relevant activities (RA) (referred to as “licensees”) to comply with annual filing requirements, as follows: 

• A notification must be submitted within six months from the end of the fiscal year (FY) declaring that the entity undertakes RA, irrespective of whether the licensee is exempt from the ESR or income was earned from RA.
• A report detailing certain business information must be submitted within 12 months from the end of the FY, but only if income was earned in the period from RA and the licensee was not exempt from the ESR. 

Upcoming deadlines for a selection of FY ends

All legal entities are encouraged to determine their upcoming ESR filing obligations as soon as possible for any completed FYs and take necessary steps to ensure filings are made within the applicable deadlines and all necessary supporting documentation is available at the time of the filing. 

Penalties for noncompliance with the ESR include financial penalties for the failure to submit a notification (AED 20,000), submit a report (AED 50,000), provide accurate or complete information (AED 50,000), and demonstrate sufficient economic substance in the UAE (first failure is AED 50,000 and second consecutive instance of failure is AED 400,000). Nonfinancial penalties include information exchanges with certain foreign authorities. The Federal Tax Authority (FTA) has begun to initiate audits.

Key ESR considerations before the end of the Financial Year

All legal entities should consider the following actions, where relevant, before the end of a FY to support compliance with the ESR:

• Assess whether the entity conducted and generated income from any of the nine RA during the period. This step is important to determine the entity's ESR compliance requirements for the FY.
• Review compliance with the applicable ESR tests (directed and managed test, core income generating activities (CIGA) test, and adequate test) if income was earned from RA during the FY.
• Take necessary steps to address any potential areas of noncompliance before the end of the FY to ensure compliance with all applicable ESR tests.
• Ensure control and supervision over any outsourcing arrangements can be demonstrated in the FY in relation to the CIGA test, e.g., through contractual agreements or correspondence.
• Collate relevant supporting documents relating to ESR compliance obligations and keep them on record in light of the Federal Tax Authority's (FTA) ESR audits. If selected for an audit, Licensees have a short turnaround period of 5 working days to provide the FTA with all requested documentation evidencing that the ESR tests are met.

The purpose of this guidance is to provide entities with an opportunity to take any necessary actions to comply with the ESR before it is too late. The Ministry of Finance (MoF) has a designated homepage for ESR, where entities can access legislation, guidance, notification and report templates.

Deloitte has developed an ESR guide to support UAE businesses with their reporting obligations. A sample version of the guide is available on the following link.