The Economic Substance Regulations was introduced in the United Arab Emirates to promote transparency and to ensure that businesses operating within the UAE contribute to the local economy. If the National Assessing Authority determines that a business has failed to comply with applicable provisions of the Economic Substance Regulations, resulting in imposition of administrative penalties in accordance with Cabinet Of Ministers Resolution

No. 57 Of 2020, concerning Economic Substance Requirements.

The Key Requirements of ESR Compliance

In order to ensure compliance with the Economic Substance Regulations, there are some requirements that must be met. These requirements include filing an Economic Substance Notification, submission of Economic Substance Report and to meet Economic Substance Test for a reportable financial period. The licensee is supposed to submit an Economic Substance Report which requires information about the business’s relevant activity, its relevant income, management of the business’s activities, employees, etc. Moreover, it is mandatory for the licensee to meet the requirements of Economic Substance Test for the relevant financial period. The National Assessing Authority assess all the information provided by the Licensee or Exempted Licensees before declaring whether the business meets the Economic Substance Test or not for the given financial period.

Offences and Penalties for Failure to Submit an Economic Substance Report and for Failure to Meet the Economic Substance Test

As specified in Article 14 of Cabinet Resolution No. 57 of 2020, Licensees and Exempted Licensees shall be imposed with administrative penalties for failure to submit the Economic Substance Report and for failure to meet the Economic Substance Test for each financial year.

1. Failure to Submit Economic Substance Report 

If Licensee or Exempted Licensee fails to submit all the necessary requirements of the Economic Substance Report and any relevant information or supporting documents required to be submitted according to the provisions of Article 8 of the Cabinet Resolution No. 57 of 2020, the National Assessing Authority shall impose an administrative penalty of AED 50,000.

2. Failure to Meet the Economic Substance Test

If Licensee or Exempted Licensee fails to meet the Economic Substance Test requirements for each financial year according to the provisions of Article 6 of the Cabinet Resolution No. 57 of 2020, the National Assessing Authority shall impose an administrative penalty of AED 50,000. Moreover, it is to note that failing to submit the Economic Substance Report will ultimately result in failure to meet the Economic Substance Test.

• Notification Process for ESR Non-Compliance

In accordance with Article 7 of the Cabinet Resolution No. 57 of 2020, the National Assessing Authority has to make an assessment of whether the Licensee or Exempted Licensee met the Economic Substance Test or not. The Authority is required to issue a notification if it determines that the Licensee or Exempted Licensee has failed to submit the Economic Substance Report and failed to meet the Economic Substance Test for the relevant financial year. The notification must include the following information:

1. The Licensee or Exempted Licensee has failed to meet the Economic Substance Test for the relevant financial year.
2. The reasons of failure to meet the Economic Substance Test.
3. The amount of the administrative penalty of AED 50,000 is imposed on the Licensee or Exempted Licensee for failure to submit the Economic Substance Report and for failure to meet the Economic Substance Test for the relevant financial year.
4. The due date of the administrative penalty, which is is not less than thirty business days after the notification is issued.
5. Repeated Violations

If the National Assessing Authority has determined that a Licensee or an Exempted Licensee has repeated the same violation  in the financial year immediately following the initial non-compliance, the National Assessing Authority shall in this case impose an an administrative penalty of AED 400,000.

• Notification Process for Repeated Violations

1. The Licensee or Exempted Licensee has again failed to meet the Economic Substance Test for the relevant financial year for the successive financial year.
2. The reasons of failure to meet the Economic Substance Test.
3. The amount of the administrative penalty of AED 400,000 is imposed on the Licensee or Exempted Licensee for failure to submit the Economic Substance Report and for failure to meet the Economic Substance Test for the repeated financial year.
4. The due date of the administrative penalty, which is is not less than thirty business days after the notification is issued.
5. The National Assessing Authority may take further administrative actions against Licensees or Exempted Licensees for failure to submit the Economic Substance Report and for failure to meet the Economic Substance Test for the repeated financial year. This could involve the suspension, revocation, or non-renewal of the business license. The Relevant Regulatory Authority will be notified of any such decision and will take the necessary steps to execute it.