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1 June 2020
Economic Substance Regulations - UAE announces relaxation while demonstrating Economic Substance amidst COVID-19
COVID-19 has had an unprecedented and severe impact on all aspects of our lives. This disease has transformed into a global pandemic disrupting lives, crumbling healthcare systems, crushing livelihood, dwindling financial markets, and devastating world economies alike in geometric progression. Whilst many countries are implementing nation-wide lockdown as a precautionary measure, financial experts fear that the present situation as one of the worst recessions since 1930. The fear is palpable as the current economy suffers from a downward trend.

In such a situation, it is highly impractical for Multinational Enterprises (MNEs) to undertake their operations in a routine manner. Especially, travel restriction within/outside country has led to an enormous shift in the way of working. UAE Ministry of Finance has also recognized the need for businesses in the UAE to adjust operating procedures to address the disruption caused by COVID-19.

The UAE introduced Economic Substance Regulations (ESR or Regulation) in 2019, which requires licensees to demonstrate economic substance for any activity undertaken by them. Amongst other substance test requirement, it mainly involves:
  • To conduct core income generating activity within the UAE;
  • To be directed and managed in the UAE;
  • To employ an adequate number of employees who are physically present in UAE;
  • To incur adequate operating expenditure/possess adequate assets.

Thus, while many businesses are still grappling with assessing the applicability of the Regulation in the first year of ESR implementation, the current situation of the global pandemic has further accelerated the hardships faced by the entities over complying with these ESR related requirements.
An important announcement by the UAE Ministry of Finance
With above in mind, the UAE Ministry of Finance (MOF) has released an industry advisory notification to address this issue. It has been announced that the UAE will take into consideration the impact of COVID-19 on the usual operations of Licensees when making a determination of whether or not a Licensee has demonstrated sufficient economic substance in the UAE.
Key highlights of the said announcement are:   
  • These considerations would only apply with respect to those substance requirements that are directly affected by COVID-19 measures (e.g., travel restrictions, self-isolation situations, or quarantine requirements).
  • It is also advised that businesses should give consideration to the ability to appoint alternate directors in UAE who can attend meetings in the UAE and thereby address any short-term practical difficulties arising from COVID-19 related measures.
  • While it is reiterated that the deadline for notification filing is extended to 30 June 2020, the deadline for the filing of the economic substance return for the financial year 2019 remains unchanged at this moment (i.e., 31 December 2020 for the Year 2019).
  • It is also clarified that the above advisory shall only apply to periods affected by COVID-19 and only to the extent required to mitigate the threats from this outbreak.
Our Comments

As we are aware, regulators in most of the countries have announced some or other relaxation measures to support MNEs/businesses in this critical economic downtime. More specifically, with respect to economic substance regulations, countries like Jersey, Guernsey, and Bermuda have announced significant relief measures to absorb the impact of COVID-19. Considering the genuine practical difficulties faced by businesses at this moment, advisory notification released by UAE MOF is a welcome move, which shall definitely help MNEs to consider COVID-19 impact while demonstrating economic substance requirements.

However, asking businesses to appoint an alternate director may not be economically feasible in this scenario, especially when most of them are facing liquidity crunches.

The announcement also clarifies that these are only temporary measures, and the businesses are required to furnish notification/report on time in order to demonstrate economic substance.

Read our previous alerts on ESR:

Click Here Recent updates and announcements
Click Here Important announcement for businesses in DIFC
Click Here Key highlights of FAQs on Economic Substance Regulations in UAE
Click Here Introduction of Economic Substance Regulations in UAE

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