Penalties for Non-Compliance with Economic Substance Regulations

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Important definitions to be kept in mind

What is a Parent Company?

The company that:

  • holds a majority of voting rights in the Licensee; or
  • has the right to appoint or remove a majority of the boards of directors of the Licensee; or
  • controls alone, under a joint arrangement with other shareholders or members, a majority of the voting rights in the Licensee; or
  • has the right to exercise, or actually exercises, dominant direct influence or control over the Licensee.

What is an Ultimate Parent Company?

The company that:

  • directly or indirectly owns a sufficient interest in the Licensee, such that it is required to prepare consolidated financial statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on a public securities exchange in its jurisdiction of tax residence; and
  • there is no other entity in the group that owns directly or indirectly an interest described in subsection (a) above in the entity under (a)

What is an Ultimate Beneficial Owner?

An individual who directly or indirectly owns 25% or more of the share capital of the Licensee.  A Licensee may have one or more Ultimate Beneficial Owners.

The non-compliance with the Economic Substance Regulations will lead to the following penalties for the businesses:-

Non-CompliancePenalty
Failure to meet the Economic Substance Test for the first timeA penalty of AED 10k to 50k
Failure to meet the Economic Substance Test for the second consecutive timeA penalty of AED 50k to 300k
Failure to NotifyA penalty of AED 10k to 50k
Failure to provide accurate or complete informationA penalty of AED 10k to 50k

And

Deemed failure to demonstrate economic substance in the UAE.

Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year: First failureA penalty of AED 10k to 50k

And

Information exchange with the foreign competent authority of: 

(1) Parent company, 

(2) Ultimate parent company, and 

(3) Ultimate beneficial owner.

Failure to demonstrate sufficient economic substance in the UAE for the relevant Financial Year: Second consecutive instance of failureA penalty of AED 100k to 300k

And

Information exchange with the foreign competent authority of: 

(1) Parent company, 

(2) Ultimate parent company, and 

(3) Ultimate beneficial owner; 

And

Trade / commercial licence could be: suspended, withdrawn, or not renewed.

 

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