The DIFC (Dubai International Financial Centre) is a financial-free zone located in Dubai, UAE. The DIFC has its own legal system and regulations, which are based on English common law.
One of the key regulations in the DIFC is the requirement for companies to have a “substantial economic activity” in order to establish and operate in the DIFC. Let’s discover what is meant by “substantial economic activity” and how this requirement is enforced by the DIFC authorities.
Economic Substance Regulations (ESR) in DIFC (Dubai International Financial Centre) Background
It is a part of the international effort to fight against offshore tax avoidance and money laundering. The regulations were first introduced in 2019, with a deadline of 31st December 2020 for all companies within DIFC to comply.
The Regulations apply to entities that are considered “Relevant Entities” (listed on Schedule 1 of Law No. 12/2018), including Holding Companies, Investment Funds, Insurance Companies, and Diversified Businesses based in DIFC.
These entities must meet the Economic Substance requirements set out by ESR in order for their activities to be considered as carried out in DIFC and not elsewhere.
Key Points to Note About Economic substance regulations UAE And How You Can Prepare Your Business Under These Regulations?
In order to comply with these new rules, relevant companies should review their business activities and assess whether they have sufficient economic substance in the DIFC. This includes but is not limited to:
- Ensuring adequate staffing and physical presence;
- Holding decision-making meetings within the DIFC;
- Having an adequate amount of business expenditure incurred in relation to activities within the DIFC; and
- Having an appropriate level of qualified personnel and resources located in the DIFC.
Companies should also ensure that they have proper accounting records, which demonstrate compliance with ESR regulations.
In addition, companies must submit a notification of whether or not they meet the economic substance requirements on an annual basis by 31st December each year.
Failure to comply with these regulations can result in significant fines for non-compliance, so it is important for companies to pay attention to the requirements and take action.
The DIFC Authority has published further guidance on Economic Substance Regulations and there are a number of professional services firms that can assist in determining whether or not companies meet the economic substance requirements.
Such firms can help organizations understand these complex regulations and ensure that they have all the required resources, processes, and procedures in place to comply with them.
Economic Substance Regulations DIFC: Who Should File the Economic substance regulations UAE Notification?
The DIFC entities that need to file a notification for ESR include financial services companies and those undertaking relevant activities, such as those involved in banking, investment fund management, securities or commodities dealing, collective investment funds, insurance, and re-insurance businesses.
Which DIFC entities need to file a Notification and How do File Annual Notifications for Economic Substance Regulations in DIFC?
ESR requires all relevant entities to ensure that their economic substance is commensurate with their corresponding income.
This means that the business must conduct significant core activity within the DIFC jurisdiction, have an adequate amount of operating expenditure, and demonstrate the adequate physical presence of qualified employees in order to meet the standard of sufficient economic substance.
Furthermore, these entities are required to carry out these functions and keep records of them on an annual basis. If they fail to do so, they may be subject to a number of sanctions, including but not limited to: fines and penalties, suspension, or winding up of the business.
To meet these standards, businesses must make sure that they have an adequate physical presence in the DIFC and sufficient operating expenditure commensurate with their income.
They must also recruit qualified personnel who are capable of carrying out the core activities of their business. Additionally, records must be maintained to ensure transparency and accuracy when filing annual notifications for ESR compliance.
Ultimately, preparing for Economic Substance Regulations DIFC can seem like a daunting task due to the complexity and the detail required for effective implementation.
However, as long as you have an understanding of what is needed from your company and are proactive in meeting the standards, you can ensure that your business will remain compliant with the requirements of ESR.
By meeting these obligations and keeping up-to-date with regulatory changes, not only will you ensure compliance with ESR but also minimize potential risks associated with non-compliance in the future.
At KGRN Audit provide guidance to help companies meet their Economic Substance Regulations DIFC requirements efficiently and cost-effectively. Get in touch today for more information.
Bottom Line
The bottom line is that all entities registered in the DIFC must ensure that their activities are carried out with sufficient economic substance within the jurisdiction. This means having a physical presence in Dubai, adequately staffed with employees who have the necessary skills and experience to carry out the company’s activities.
The onus is on companies to determine whether their activities meet the requirements set forth by ES regulations and to make any changes as necessary to comply.
Non-compliance could result in financial penalties, reputational damage, or even revocation of one’s business license, so it’s important to take these regulations seriously.
Have you reviewed your business practices in light of ES Regulations? What changes will you need to make to ensure compliance?