The UAE and other countries in the Middle East are members of the OECD's Base Erosion and Profit Shifting (BEP) which bounds the members to implement certain minimum tax & other reforms, including Country by Country Reporting (CbCR) and Economic Substance Reporting (ESR) for entities which are part of a large multinationals or involved in certain relevant activities as defined by relevant UAE cabinet resolutions.
What is Economic Substance Reporting
UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 concerning economic substance regulations in the UAE on 30 April 2019 requiring all UAE entities that carry on certain activities called Relevant Activities to demonstrate economic substance in the UAE from 30 April 2019. The regulations applies to UAE based entities that carry relevant activities to report and file certain reporting & notification with relevant authorities, this excludes entities where government is a stakeholder. The ESR regulation have been issued in response to comply the concerns raised by European Commission and inclusion of UAE in non-cooperative tax jurisdiction, the initiative will further align the UAE regulatory environment to the standard set out in the OECD Base Erosion and Profit Shifting (BEPS) action plans.
Following are the nine activities which are considered as Relevant Activities:
- Banking
- Insurance
- Fund management
- Lease-finance
- Headquarters
- Shipping
- Holding company
- Intellectual property (IP)
- Distribution and service center
Economic Substance Test and Requirements
Entities are required to stratify certain requirements to fall under the Economic Substance Reporting and Compliance in UAE:
- Engage and conduct relevant “Core Income Generating Activities called CIGA, in UAE.
- Directed and Managed within the UAE.
- Have employees, premises or assets in the UAE.
- Inquire adequate expenses in the UAE.
- If outsourced certain activities, the outsourcing activities must be performed and based in UAE.
If entities are carrying more than one relevant activity, each activity must meet the economic substance requirements.
Where to report Economic Substance Reporting
The relevant incorporating authority is nominated as regulatory authority for ESR compliance reporting and notification filling, here is the list issued by government of UAE:
| Banking Business | UAE Central Bank & Financial Free Zone for banking business carried out therein |
| Insurance Business | Insurance Authority & Competent Authority in Free Zone/Financial Free Zone for business carried out therein |
| Investment Fund Management Business | Security and Commodity Authority & Competent Authority in Free Zone/Financial Free Zone for business carried out therein |
| Lease Finance Business | UAE Central Bank & Financial Free Zone for banking business carried out therein |
| Headquarter Business | Ministry of Economy & Competent Authority in Free Zone/Financial Free Zone for business carried out therein |
| Shipping Business | Ministry of Economy & Competent Authority in Free Zone/Financial Free Zone for business carried out therein |
| Holding Company Business | Ministry of Economy & Competent Authority in Free Zone/Financial Free Zone for business carried out therein |
| Intellectual Property Business | Ministry of Economy & Competent Authority in Free Zone/Financial Free Zone for business carried out therein |
| Distribution and Service Center Business | Ministry of Economy & Competent Authority in Free Zone/Financial Free Zone for business carried out therein |
Penalties on Economic Substance non-Compliance
Economic Substance Reporting in UAE is a serious subject, non-compliance will fetch following penalties:
Annual administrative penalties of AED 10,000 to AED 300,000 apply if an entity does not meet the requirements or if inaccurate/no information is provided to the regulatory authority. The penalties shall increase where there are failings in consecutive years and ultimately regulatory authorities may suspend, revoke or deny renewal of an entity license
Country by Country Reporting (CbCR) in UAE
CbCR is a part of Action 13 of the Base Erosion and Profit Shifting (BEPS) project that is led by the G20 and the Organisation for Economic Co-operation and Development (OECD). The BEPS initiative is aimed at preventing tax planning that exploits gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. The UAE joined the BEPS Inclusive Framework (BEPS IF) on 16 May 2018and has committed to implementing the four BEPS minimum standards, including CbCR.
UAE has issued a CbCR legislation on April 2019 under the Cabinet Resolution no 32 of 2019 and as of October 2019, the UAE has signed and ratified the multilateral competent authority agreement (MCAA) on the exchange of CbC reports, but has signed 49 agreements for the automatic exchange of CbC reports, effective for periods beginning January 1, 2019.
Applicability of CbCR in UAE
UAE entities that are:
- tax resident in UAE
- are constituent entities of Multinational (MNE) Groups, and
- have a consolidated revenue of AED 3.15 billion or more in the preceding Group financial year has to file a CbCR Reporting/Notification as follows:
- CbC Report for the financial year beginning of after January 1, 2019 within the 12 months from the end of the group financial year.
- CbCR Notification by the end of the group financial year.
Penalties of non-compliance with CbCR in UAE
There are four types of administrative penalties ranging from AED50,000 to AED 1,000,000. Additional penalty of AED 10,000 per day to a maximum of AED250,000 for delay in filing.