Upcoming Economic Substance reporting obligations and how UAE businesses can prepare

The Economic Substance Regulations (ESR), as introduced last year by the United Arab Emirates (UAE), was significantly overhauled in August 2020 through revised legislation and updated guidance. The first filing deadline of the comprehensive Economic Substance Report for 2019, being the first reportable year, is 31 December 2020 for UAE based entities with financial years ending on 31 December 2019. On 22 October 2020 the UAE Ministry of Finance (MOF) finally published the long-awaited Economic Substance Report template which will be instrumental for UAE based entities to adequately prepare for their filing obligations, under the rapidly approaching ESR deadlines.

Background

The UAE introduced the ESR in 2019 in order to get removed from the European Union’s blacklist. Whilst the revised legislation and updated guidance of August 2020 provided significant changes, the fundamental aspects of the ESR remain the same for UAE based entities. As such, entities that have performed any of the Relevant Activities under the ESR during 2019 will need to submit the Economic Substance Report, in most cases on or before 31 December 2020. Our previous Alerts described the ESR and the most recent changes in more detail (June 26 and October 10, 2019 and April 7, May 13 and 3 September 2020).

Upcoming reporting obligations

Under the previous regulations, UAE based entities were required to file the Notification and Economic Substance Report with their Regulatory Authority, such as the relevant free zone authorities or the Ministry of Economy for UAE mainland companies, depending on the type of Relevant Activity performed. The revised ESR made clear that the Ministry of Finance (MOF) will launch a digital portal to facilitate the electronic filing of all Notifications, Economic Substance Reports and other relevant information. In fact, the guidance to the revised ESR stipulates that Notifications which have already been submitted to the Regulatory Authorities before 30 June 2020, must be resubmitted through the MOF’s digital portal, once available. With the subsequent Economic Substance Report filing deadline of 31 December 2020 approaching, many UAE based entities falling within the ESR scope will most likely submit these forms around the same time.

Required information

With respect to the Notification and the Economic Substance Report, MOF has published the templates on its website on 22 October 2020. These recently published templates finally provide UAE based entities with the desired certainty on which information must be provided in case they fall within the scope of the ESR. The required information according to the Economic Substance Report’s template is relatively detailed, especially where it concerns Relevant Activity related aspects such as (relevant) income, expenditure, employees and other substance criteria.

Federal Tax Authority

The revised ESR appointed the UAE Federal Tax Authority (FTA) to (i) undertake assessments of whether in-scope entities meet the Economic Substance tests, (ii) impose administrative penalties for non-compliance and (iii) hear and decide on appeals, among others. Now that these enforcement tools have been shifted from the Regulatory Authorities to the FTA, a strict policy against non-compliance may in our view be expected.

Key takeaways

With the recent publication of the Economic Substance Report template, UAE based entities falling within the scope of the ESR finally have sufficient guidance to adequately prepare towards the initial filing deadline of 31 December 2020. Because it is not exactly certain when the MOF’s digital portal will go live, it is not unthinkable that Licensees may have limited time in December to gather and prepare all required information for filing purposes (also because this is already a very busy period for businesses). Therefore, we strongly recommend clients to closely consider the Economic Substance Report template now and already prepare for the actual filings for when the portal goes live.