Economic Substance Regulations in the UAE: Understanding Offenses and Penalties

Resolution No.57 of 2020, issued by the Cabinet of Ministers, outlines the Economic Substance Regulations that mandate compliance for business entities engaged in specified activities within the UAE. Termed ‘Relevant Activities,’ these include banking, insurance, fund management, leasing, holding companies, and intellectual property businesses. Entities conducting Relevant Activities must satisfy the Economic Substance Test, encompassing Core Income Generating Activities and other criteria such as a requisite number of qualified employees and operating expenses within the UAE. Failure to meet this test subjects the entity to penalties as stipulated in the resolution.

Offenses and Penalties:

  • Administrative Penalties for Non-Compliance:

Compliance with the Economic Substance Test is a focal point for the UAE government to ensure the legitimacy of business operations. Stringent penalties are in place to deter non-compliance.

  • Administrative Penalty for the First Offense:

If a UAE-registered company, referred to as a Licensee or Exempted Licensee, fails to meet the Economic Substance Test during a Financial Year, it incurs an initial administrative penalty of 50,000 AED. This penalty is applied per financial year.

Repeated Violation in the Following Year:

For a recurrent offense in the subsequent Financial Year, the same business faces a significantly higher penalty of 400,000 AED.

Notification Process and Consequences:

Notice of Non-Compliance:

Upon detecting non-compliance with the Economic Substance Test, the National Assessing Authority issues a comprehensive notice to the Licensee or Exempted Licensee, covering key aspects:

(a) Understanding the Decision:

The notice elucidates the reasons for non-compliance, ensuring transparency in the regulatory process.

(b) Financial Consequences Outlined:

It specifies the administrative penalty (50,000 AED) and emphasizes the financial implications of non-compliance.

(c) Adequate Time for Compliance:

A minimum of thirty (30) Business Days is granted for the entity to rectify non-compliance.

Repeated Violations and Increased Penalties:

For persistent non-compliance in consecutive Financial Years:

(a) Failure in Two Consecutive Years:

A notice highlights the recurring non-compliance, providing a detailed account of the reasons.

(b) Increased Penalty:

The penalty escalates to 400,000 AED, emphasizing the seriousness of persistent non-compliance.

(c) Adequate Time for Compliance:

A minimum of thirty (30) Business Days is provided to address the escalated penalty.

(d) Further Administrative Actions:

The National Assessing Authority can enforce additional actions, including suspension, revocation, or non-renewal of the license, with prompt communication to the Relevant Regulatory Authority.

Consult Top ESR Consultants in UAE

Compliance with the UAE’s economic substance regulations is essential to avoid substantial financial and legal repercussions. Entities engaged in Relevant Activities are advised to seek professional guidance to ensure full compliance and mitigate potential penalties. Consulting firms, such as ESR Consultants in UAE, can provide the necessary expertise for navigating these regulations successfully. Thus, contact us today and we shall be glad to assist you. 

Read More: Economic Substance Reporting: Challenges and Opportunities for Multinational Corporations