UAE substantially repeals economic substance penalty regime

The obligation was introduced under the Economic Substance Regulations 2019 to comply with international initiatives against 'harmful tax practices', meaning the shifting of profits to so-called 'brass plate' shell companies in low-tax jurisdictions. It required entities to file notifications of their economic activities within six months of the end of their financial year or face penalties between AED20,000 and AED400,000. Some entities also had to provide a further report within 12 months of the end of each financial year.

Now, under Cabinet Decision No.98 of 2024 gazetted on 16 September 2024, these reports are no longer required for financial years commenced after 31 December 2022. Penalties will not be imposed on any entities that did not observe economic substance regulation filing deadlines relating to financial years started after 31 December 2022. The Federal Tax Authority will refund any penalties already paid for those financial years, although the mechanism for claiming refunds is not yet published.

The announcement ‘removes a potentially burdensome compliance obligation’ and is positive news to UAE businesses, said law firm Amereller. However, the firm noted that the requirement to demonstrate adequate economic substance has not disappeared entirely. It continues to be one of the conditions imposed by the UAE corporate tax regulations and is particularly relevant for businesses that wish to benefit from the special qualifying free zone person tax regime. Companies will still need to report adequate substance in their UAE corporate tax return to the Federal Tax Authority.

Separately, the UAE Federal Tax Authority has postponed the corporate tax return filing deadline to 31 December 2024 for companies incorporated on or after 1 June 2023, or whose tax period ended before 1 March 2024. The decision recognises the challenges faced by taxpayers in meeting their corporate tax obligations, which were introduced in 2023.

Sources

• Amereller
• Baker McKenzie
• DLA Piper