With effect from 1 January 2019, the Economic Substance Regulations (ESR) require UAE onshore and free zone entities (including free zone offshore entities) and certain other business forms that carry out a relevant activity as defined in the ESR (the Licensee), to file an ESR notification within 6 months from the closing of the relevant financial period in which such Licensee undertook a relevant activity.

Additionally, in the event such Licensee earns income from the relevant activity and is not an exempted licensee under the ESR, such Licensee is required to meet the economic substance test by filing an ESR report within 12 months from the closing of the relevant financial period.

Some critical aspects of the ESR that need consideration by UAE entities are listed below:

• ESR assessment should be done for each financial period and should take into account the activities undertaken by the Licensee at any time throughout the relevant financial period.

• A “substance over form” approach must be adopted to determine whether a Licensee undertakes a relevant activity that is within the scope of the ESR, i.e., looking beyond what is stated on the commercial license to the activities actually undertaken by the Licensee during a financial period.

• A UAE entity that grants a loan or provides any other form of credit to a UAE or foreign group company for consideration (e.g., interest) is considered to be engaged in a lease-finance business.

• Headquarter business includes, inter alia, provision of senior management services to one or more foreign group companies. A group’s corporate structure is not relevant in determining whether a UAE entity within the group is engaged in headquarter business.

• A UAE entity that holds other assets or earns other forms of income is not considered as engaged in holding company business. Where the holding of such other assets or the performance of other commercial activities constitutes a different “relevant activity”, the UAE entity would be subject to the ESR in respect of that other relevant activity. Where the performance of other business activities does not meet the definition of any of the other relevant activities, the UAE entity is not subject to ESR.

• If a Licensee fails to comply with the ESR, it will be subject to administrative penalties amounting to (a) AED 20,000 for failure to submit the ESR Notification; and (b) AED 50,000 for failure to either (i) submit the ESR report and any relevant information or documentation required to be submitted in accordance with the ESR; or (ii) meet the economic substance test, and such penalty may rise to AED 400,000 and lead to suspension, revocation or non-renewal of the license if such failure is repeated in the immediately following financial year.