Two more weeks for the Economic Substance reporting to avoid penalties

The Economic Substance Regulations (ESR) require United Arab Emirates (UAE) based entities and branches to analyse their status under the revised rules and, in most cases, to report on their business activities and Economic Substance in the UAE on or before 31 December 2020. This means there are now two weeks left for most UAE entities who have not yet completed their reporting. Timely filing of the ESR Notification and ESR Report is strongly recommended because of the penalties for non-compliance of AED20,000 and AED50,000 respectively.

Background

The UAE introduced the ESR in 2019 in order to get removed from the European Union’s blacklist. In August 2020, the UAE introduced significant changes to the ESR ahead of the first filing deadlines in relation to the ESR’s first reportable year 2019. Under the ESR, UAE entities with the calendar year as Financial Year (FY) must report on the FY 2019 on or before 31 December 2020. Our previous Alerts describe the ESR and the mentioned changes in more detail (June 26 and 10 October 2019 and April 7, May 13, 3 September and 26 October 2020).

ESR reporting obligations

Firstly, UAE based entities need to determine whether or not they performed any of the nine Relevant Activities during the FY 2019. If that is the case, the ESR Notification must be completed and submitted through the online portal provided by the UAE Ministry of Finance (MOF). Secondly, if an entity generated Relevant Income with those activities during the FY 2019, it must subsequently complete and submit the more extensive ESR Report through the mentioned portal. The 31 December 2020 deadline applies for both the ESR Notification and ESR Report. Entities not performing any of the Relevant Activities during the FY 2019 do not need to report under the ESR for that year. Entities (or branches) that can claim any of the specific exemptions under the ESR can do so by means of the ESR Notification.

Penalties for non-compliance

The ESR come with significant penalties for non-compliance, which are imposable by the UAE Federal Tax Authority (FTA). Failure to timely submit the ESR Notification and ESR Report comes with a penalty of AED20,000 and AED50,000 respectively. Failure to provide accurate information in either the ESR Notification or ESR Report comes with a AED50,000 penalty. Finally, failure to demonstrate sufficient Economic Substance in the UAE for the relevant year means that a penalty of AED50,000 may be imposed.

Key takeaways

UAE based entities falling within the scope of the ESR must complete and submit the ESR Notification and ESR Report through the UAE MOF’s online portal before 31 December 2020. The first thing UAE entities must do is determine to which extent the ESR reporting obligations apply to them. In the affirmative, such entities must ensure they timely complete and submit the relevant ESR documentation to avoid the significant penalties for non-compliance.