The anticipated deadline of 31st March 2020 for notification under the Economic Substance Regulations (“ESR”) is fast approaching. Businesses should understand how the ESR will affect them and consider whether they will need to take steps to demonstrate compliance with the new regulations.
Since the introduction of the ESR in 2019 (Click here to see our previous article on ESR), the UAE Ministry of Finance has released several guidance notes (click here) and published FAQs to clarify aspects of the regulations. While these guidance notes and FAQs go some way towards helping companies understand the scope of the ESR, further guidance is expected to clarify how the ESR will apply. In the meantime, the key aspects of the MOF guidance notes and FAQs are as follows:
- The ESR apply to any juridical or natural person registered under UAE law (including all free zones) to carry out a business licensed by an authority in the UAE including an LLC, Branch, Representative Office, partnership or sole proprietorship.
- The authority issuing the “licence” of an entity is the “Relevant Authority” for the purposes of notification and reporting under the ESR
- While an entity may fall within the scope of the ESR, it may not be required to demonstrate compliance with the ESR. For example, the ESR will only apply to an entity deriving an income from a “Relevant Activity” in the UAE.
- The ESR will not apply to:
a) an entity that does not carry on a Relevant Activity; or
b) an entity in which the Federal or State government of the UAE has a direct or indirect share interest.
- In determining whether an entity is conducting a “relevant activity”, regard must be had to the actual activities of the company which may be different from or additional to the activities stated on the entity’s licence.
- It is a requirement of the ESR that an entity be ‘directed and managed” in the UAE. An entity can satisfy this requirement by holding at least one meeting in the UAE per financial year with a quorum of directors or the manager (as the case may be for an individually managed entity) physically present.
- The ESR requires that an “adequate” level of core income generating activities (CIGA) take place in the UAE. An entity may outsource CIGA to a related party in the UAE. However, the entity has an obligation to demonstrate that outsourcing CIGA third-party or related-party service providers is not being done to circumvent compliance with the ESR.
- Holding companies whose activities are limited to holding equity participation are not required to demonstrate that they carry out CIGA in the UAE. However, holding companies that undertake a relevant activity in addition to solely receiving income from equity interests (i.e., dividends and capital gains) must meet the full ESR requirements.