Following our recent Economic Substance (ES) regulations (ESR) alert, the Ministry of Finance (MoF) has confirmed the deadline for the ES notification as 30th June, 2020.
ESR impacts all UAE entities (including government and partially owned government entities – see below). Compliance with these regulations involve two steps:
ES notification confirming whether an entity is carrying on a relevant activity* or not
30 June 2020 deadline for FY19
ES return demonstrating substance maintained in the UAE for performing relevant activities (eligible government owned entities are exempt from the ES return requirement)
31 December 2020 deadline for FY19
*Relevant activities for ESR purpose:
(a) Banking (b) Insurance (c) Investment fund management (d) Lease-finance (e) Headquarters (f) Shipping (g) Holding company (h) Intellectual property (i) Distribution and service center
A government owned entity (i.e., 51% or more direct or indirect shareholding by the government/emirate) is exempt from ESR. However, the difference between the initially issued regulations and subsequent guidance and FAQs resulted in ambiguity on whether an ES notification is required to be made if a government entity is conducting any of the relevant activities being monitored under the ESR. It is clear, however, that a government owned entity that qualifies for the exemption is not required to submit an ES Return.
Based on the clarifications obtained from the MoF’s FAQs and guidance, all entities (including exempt entities i.e. 51% or more government owned companies) performing relevant activities should submit an ES notification declaring the relevant activities being performed.
This interpretation is also supported by the guidance published recently by the Ministry of Economy, the authority responsible for governing compliance for mainland licensees. This position has also been adopted by number of free trade zones (such as ADGM, RAKEZ, SAIF, Hamriyah etc).
Key actions for consideration:
1. Number of notifications to be made: It is not permitted to submit group notifications, therefore each entity with a commercial license should file its notification with the respective regulatory authorities (i.e. Ministry of Economy, Free Trade Zone authorities, UAE Central Bank, etc.).
2. Conduct of relevant activity: The guidelines require the conduct of relevant activity to be determined based on a ‘substance over form’ approach. Therefore, reliance on the commercial license is not sufficient and an analysis of actual business activities undertaken by the entity should be performed to determine whether it is carrying on any of the prescribed relevant activities. Of the nine activities, government owned entities should consider the following four activities in particular:
- holding companies
- headquarter business
- service center business
- lease finance business (includes provision of loans to related and third parties for consideration)
3. Completion and submission of the form: As noted previously, the deadline for the ES notification is 30th June 2020 for financial year 2019.
4. Collation of supporting documentation: It may be possible that documentation demonstrating government ownership is required to be submitted. Currently, there is no guidance on what would be considered as acceptable/adequate documentation; however, the guidance issued by some regulatory authorities notes that additional information could be asked for the purposes of receiving an exemption from filing the ES return.
Please note that there are penalties of between AED 10k to 50k associated with both incorrect and late/non-filing of the notification. Further, for government-owned entities, the exemption from ESR would rely on submission of the notification, which may be subject to submission of further documents to substantiate the exemption claim.
We would be happy to discuss this with you further and support you in filing an accurate ES notification for your group entities.