New Guidance on UAE Economic Substance Regulation (“ESR”)

The UAE Cabinet of Ministers has issued Cabinet Resolution No. 57 of 2020 (the “amended ES Regulations”) along with updated Guidance clarifying the amended ES Regulations (Ministerial Decision 100 of 2020 dated 19 August 2020) which repeals and replaces the original ES Regulation (Ministerial Decision No. 215 of 2019 and Cabinet Decision No. 31 of 2019). The New Guidance has brought many changes and provided several clarifications on the ESR Requirements for entities in the UAE and some of them are listed below: 01. The New Guidance has been applicable from retrospective date 01st January 2019.

02. Notification and renotification requirements to be submitted electronically to MOF online portal: Notification is required to be given within 6 months after the end of respective financial year-end (e.g. 31st December – Notification by 30th June) Re-notification in respect of previously filed notifications.

03. New ESR Regulation provides a revised list of penalties and sanctions viz. Failure to A. Provide ESR Notification – AED 20,000 B. Provide ESR Report – AED 50,000

C. Provide accurate or complete information – AED 10,000 to AED 50,000 D. Demonstrate Economic Substance – First Failure – AED 50,000, Second Failure – AED 400,000 and information exchanged with Foreign Competent Authority of (i) Parent Company, (ii) Ultimate Parent Company and (iii) Ultimate Beneficial Owner E. New exempted entities have been defined and the requirement of 51% government ownership exemption criteria has been removed. F. Clarification on the status of branch of UAE local company and branch of foreign company. G. Removal of Investment Funds as part of Investment Fund Management business unless it is a self-managed fund. H. Amendment in the scope of Distribution and Service Centre Business classification. I. Federal Tax Authority shall be responsible for assessing and determining the economic substance in UAE and Regulatory Authorities shall be responsible for collecting and reviewing the accuracy of notifications and reports. J. The requirement to have qualified full-time employees has been modified and considers the employees who are physically present in UAE.

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