Economic Substance Advisory

Economic Substance Reporting Services in the United Arab Emirates

The Economic Substance Regulations (ESR) were introduced in the UAE on 30 April 2019 pursuant to the Cabinet of Ministers Resolution No.31 of 2019 (“Regulations”). Following this, guidance on the application of these regulations was also introduced as per the Ministerial Decision No. 215 of 2019. As per the regulations, UAE-based businesses that carry out the relevant activities listed in the UAE economic substance guidance are required to demonstrate adequate economic presence by meeting the UAE economic substance test. The regulations mandate that companies need to notify and submit an annual UAE economic substance report to the regulatory authorities if they are carrying out relevant activities. Businesses must ensure timely submission of their economic substance notification in Dubai to avoid penalties and remain compliant with UAE Ministry of Finance ESR guidelines. This is especially important for businesses subject to economic substance requirements in mainland Dubai.

UAE Economic Substance Reporting & Notification

Companies in the UAE carrying out relevant activities need to notify the regulatory authority on an annual basis. They must report:

Whether they are carrying out a relevant activity in the UAE
Whether any income is subject to tax outside the UAE
The date of the financial year

Al Fakher Accounting can assist you in navigating the complexities of the Economic Substance Regulations and ensure timely and accurate reporting to avoid any penalties.

The companies need to submit an annual report to the Regulatory Authority every year to demonstrate if they are carrying out the relevant activity. It is mandatory to provide details of the activity, income, expenses, and assets that declare whether the UAE economic substance test is fulfilled. The companies need to submit the report to the Authority within 12 months of the end of each financial year. This requirement also extends to companies fulfilling economic substance for mainland companies, ensuring compliance with the onshore ESR rules.

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UAE Economic Substance Requirement

The following are some of the major actions companies need to undertake before the end of a financial period:

Assess the Relevant Activities carried out during the financial period using a substance-over-form approach
Assess the amount and type of income generated from the Relevant Activity during the financial period
Hold Board Meetings with directors physically present in the UAE
Sign and maintain board meeting minutes in the UAE
Determine the amount and type of expenses and UAE-based assets related to the Relevant Activity
Ensure that access to assets can be proven through agreements and financial records
Determine the number of full-time UAE-based employees responsible for the Relevant Activities
Demonstrate control and supervision of any outsourcing arrangements

Al Fakher Accounting can guide your company through these crucial steps to ensure full compliance with the UAE Economic Substance Regulations.

What Are the Relevant Activities for UAE Economic Substance Reporting?

Economic Substance reporting regulations apply to the UAE businesses that carry out the following relevant activities.

Banking Business
Insurance Business
Investment Fund management Business
Lease – Finance Business
Headquarters Business
Shipping Business
Holding Company Business
Intellectual property Business (“IP”)
Distribution and Service Centre Business

For the comprehensive guide on relevant activities for UAE economic substance guidance, click here

How to Assess Whether Your Business is Required to Submit An Economic Substance Report in the UAE?

Businesses registered in the UAE can use the substance-over-form method to determine whether they undertake a relevant activity or not. This means companies need to assess not only the activities associated with their commercial license or registration certificate but also the activities actually carried out during a financial period.

As per the regulations on Economic Substance Test Reporting in Dubai, UAE, companies need not actively carry out the relevant activities to be subject to the rules. For example, regulatory authorities may consider the passive receipt of income under a finance lease as evidence that a company is carrying out a Lease-Finance Business.

According to the regulations, businesses may undertake one or more relevant activities during the same financial period. Companies are required to demonstrate economic substance for each activity unless the activities are ancillary to the main activity. The regulations allow consolidating ancillary activities under the main relevant activity, which helps avoid duplicate reporting. This analysis is especially important for businesses subject to economic substance requirements for mainland Dubai entities.

Al Fakher Accounting can help your business navigate these regulations effectively, ensuring compliance while avoiding unnecessary reporting.

List of Regulatory Authorities that Oversee Each Relevant Activity

There are regulatory authorities overseeing the Economic Substance Test Reporting for companies corresponding to each relevant activity. For free zones and financial free zones, the respective competent free zone authority governs each activity. For onshore companies, the following are the designated Regulatory Authorities:

Banking Business
The UAE Central Bank is the regulatory authority for the banking business.
Insurance Business
The Insurance Authority regulates companies carrying out insurance business.
Investment Fund Management Business
The Securities and Commodities Authority oversees the Investment and Fund Management Business.
Lease – Finance Business
Companies engaged in Lease Finance Business report their economic substance to the UAE Central Bank.
Headquarters Business
The UAE Ministry of Economy acts as the regulatory authority for companies involved in Headquarters Business.
Shipping Business
The UAE Ministry of Economy regulates companies conducting Shipping Business.
Holding Company Business
The Ministry of Economy is the regulatory authority for Holding Company Business activities.
Intellectual Property Business (IP)
The Ministry of Economy oversees Intellectual Property Business activities for Economic Substance Test Reporting.
Distribution and Service Centre Business
The UAE Ministry of Economy regulates companies engaged in Distribution and Service Centre Business.

Al Fakher Accounting can assist your business in identifying the relevant regulatory authority and ensuring timely and accurate Economic Substance Test Reporting to maintain compliance.

Penalties for Failing to Comply with the UAE Economic Substance Reporting

Failure to comply with the Economic Substance Test Reporting Regulations may attract different actions and penalties from the authorities in the UAE. A Fine of AED 10,000 to AED 50,000 will be imposed on the companies that:

Fail to notify
Fail to provide accurate or complete information
Fail to demonstrate economic substance in the UAE
Fail to demonstrate sufficient economic substance in the UAE for the relevant Financial Year

A fine of up to AED 30,000 will be incurred if the companies repeatedly fail to demonstrate the economic substance in the UAE. The repeated failure to demonstrate adequate economic substance may also attract actions like suspension, withdrawal, or non-renewal of trade license. Companies based in the UAE mainland must be especially vigilant in meeting ESR obligations to maintain their operational licenses.

UAE Economic Substance Advisory

The onshore, free zone, and financial free zone companies in the UAE are required to demonstrate adequate economic substance in the relevant activities they carry out within the country. These companies must notify and submit an annual report to the respective regulatory authority, ensuring compliance with the UAE Economic Substance Test requirements. However, since this is a relatively new regulation, companies may inadvertently provide inaccurate or incomplete information, which can lead to significant penalties.

To avoid such costly mistakes and to ensure full compliance with Economic Substance Regulations, expert assistance from a reputable Chartered Accountancy firm like Al Fakher Accounting is essential.

Al Fakher Accounting is one of the leading Chartered Accountant firms in Dubai, UAE, offering comprehensive support for all Economic Substance Reporting requirements. Our team of highly qualified Chartered Accountants assists companies in assessing whether they fall under the scope of these regulations. For companies subject to the regulations, Al Fakher Accounting evaluates their operations across all emirates (onshore and free zones) to determine if their current activities meet the UAE Economic Substance criteria.

We provide effective compliance solutions tailored to your business needs. Our services include preparing economic substance notifications and submitting the required reports to the relevant regulatory authorities.

For businesses operating in the UAE mainland, compliance with Economic Substance Regulations is crucial to avoid penalties and maintain adherence to ESR requirements.