Penalties and exchange of information in the economic substance regulations

As discussed in our previous article, every licensee who earns relevant income from a relevant activity should submit notification within six months from the end of the relevant financial year, satisfy the economic substance test and submit the report within twelve months from the end of the relevant financial year.

Where the licensee conducts relevant activities but has not earned any income during the financial year, they are liable to submit the notification only, and it is not compulsory for them to satisfy the Economic Substance test and submit the report. We have emphasized that exempted licensee is liable to submit the notification only, and where they fail to submit the notification, they will be treated as a normal licensee and all provisions of the normal licensee would be applicable to them.

The requirement to satisfy the economic substance test is to comply with the (i) functional test, (ii) management test and (iii) adequacy test. The adequacy test requires that the licensee or exempted licensee or third party to whom work has been outsourced must have (i) adequate employees, (ii) adequate operating expenditures, and (iii) adequate physical assets in the state.

There are a lot of regulatory authorities like the central bank, insurance authorities, security and commodity authorities, ministry of economy, free zone authorities etc. that have been tasked to regulate the implementation of Economic Substance Regulations (ESR) in the state. Each regulatory authority collects the notification, report and relevant supporting documents from the licensee and exempted licensee. The authority reviews the information to ensure the completeness and correctness of the documents provided to them. The authority carries out the powers to implement the decisions of the other authorities like the competent authority [the Ministry of Finance (MoF) has been named as competent authority] and the national assessing authority [Federal Tax Authority (FTA) is the national assessing authority]. The regulatory authority collects information from the licensee or exempted licensee and passes it on to the FTA within thirty business days of the receipt thereof. The same time period is applicable If the licensee or the exempted licensee fails to submit the notification, ESR report and other documents.

The FTA, being a national assessing authority, undertakes an assessment to determine whether the licensee and exempted licensee have met the ESR test and FTA can make this assessment maximum within six years after the end of the financial years to which the test relates. The stipulated time of six years will not be applicable where the licensee or exempted licensee has done fraud, misrepresentation or gross negligence. Where the licensee and exempted licensee have not met the ESR test requirement, the FTA shall impose penalties and provide this information to MoF. The FTA shall hear and decide on appeals. The FTA shall exercise the powers and functions to implement the decision of the MoF. The licensee or exempted licensee that is involved in the high-risk intellectual property business, FTA will collect and provide information about such licensee or exempted licensee to the MoF.

Upon receipt of the information about the licensee or exempted licensee who has not met the ESR test, or the licensee or exempted licensee who is involved in the high-risk intellectual property business, the MoF shall pass on the information to the foreign competent authority, the ultimate parent company, and the ultimate beneficial owner of the licensee or exempted licensee.

If the licensee or the exempted licensee fails to meet the notification requirements, a fine of Dh20,000 is applicable. Where the licensee or exempted licensee has failed to meet the ESR test or fails to submit an ESR report and other documents, an administrative penalty of Dh50,000 shall be imposed for the first year, and the penalty for the immediately subsequent year would be Dh400,000.

If the licensee or exempted licensee Intentionally provides inaccurate information or fails to inform when aware of this inaccurate information a penalty of Dh50,000 would be applicable by the FTA. In the case of persistent non-compliance, the national assessing authority may suspend or revoke or not renewed the license.

The FTA may impose the penalty maximum within six years from the date violation was committed but the time to impose the penalty for the offence of providing inaccurate information is a maximum of 12 months from the date on which the violation came to the attention of the FTA. Where the licensee or the exempted licensee has committed fraud and the national assessing authority fails to impose penalties in the stipulated time, the above timeline would not be applicable.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer. For any queries/clarifications, please write to him at compliance@kresscooper.com