as of 16 November 2022

THE ULTIMATE BENEFICIAL OWNER (UBO): PROTECTIVE MEASURE FOR COMPANIES IN THE UAE

Introduction

To create a safer and more financially sound environment for businesses, a new cabinet resolution, also known as the UBO Resolution, came into place on August 28, 2020, regulating the reporting and registration of the Ultimate Beneficial Owners (UBOs). The new resolution has been created following the Anti-Money Laundering and Anti-Terrorist Financial regulations.

According to the Dubai Development Authority (DDA) and Department of Economic Development (DED) all businesses, including the FZLLCs or Branch Offices, are required to disclose their Ultimate Beneficial Owners (UBOs) who directly or indirectly own or partially control companies, entities, or other structures.

What are UBOs?

The Ultimate Beneficial Owners (UBOs) are individuals who own or control a customer or a natural person on whose behalf a transaction is conducted. UBOs are those who exercise a form of legal control over a person or an arrangement. They are required to identify and disclose their complete business and financial transactions to the regulatory authorities.

This means that companies need to be transparent about their professional dealings with other parties, especially with those they are doing business with. This includes their customers, vendors, suppliers, and other corporate entities.

At times, it may be difficult to identify a UBO as they are camouflaging their identities under their corporate or organizational structure.

Why are UBOs important?

Over the years, the UAE has created stringent measures to combat terrorism and money laundering activities that have been hindering the economic transparency initiative of the nation. In certain cases, criminals send illegal funds and conduct transactions using proxies or corporate entities such as shell companies to conceal their identities.

Billions are lost every year through shell company-related money laundering activities. Shell companies have been formed for legitimate reasons but are frequently misused by criminals using legitimate financial systems. A UBO check is important for a business partner check. The corporate entity should be aware of the parties they are dealing with.

Many fraudulent parties have been detected that utilize offshore accounts to mask their suspicious transactions to fictitious addresses of seemingly credulous residents. By investigating ultimate beneficial ownership, companies can mitigate the risks of shell companies, detect money laundering activities and eliminate the misuse of any corporate and financial infrastructure.

To prevent businesses from doing dealings with criminal parties, all companies are obliged to file a UBO declaration that establishes the identity of a UBO. Specific UBO requirements should be put in place for companies to report their beneficial or business owners to the government. By doing this, the companies will adhere to the international rules and regulations of AML, corruption, bribery, KYC, and WWFT. This will protect companies from fraud, high fines, reputational damages, and possible imprisonment.

What are the requirements?

Companies need to maintain a register for shareholders, beneficiary owners, and nominee directors. They need to file the complete information of beneficiary owners and interests in the company. Aside from the requirements of the UBO registration and maintenance, companies need to disclose if there are any changes among their beneficial owners and nominee directors within a designated period.

How do you identify a UBO?

A UBO is the ultimate beneficiary of an organization that does a business transaction. To identify a UBO, there are certain guidelines that authorities adhere to: 

• Owns at least 25% of share capital
• Exercises at least 25% of voting rights
• Holds at least 25% of the entity’s capital
• Possesses power of attorney
• Recognized as guardians of minors
• Appointed as corporate directors or nominee directors
• Selected shareholders and holders of bearer shares 

What companies are part of the UBO resolution?

The UBO resolution applies to all the companies that are licensed and registered in the UAE. Companies that are registered as FZ LLC or a branch office of a foreign company are required to submit the completed UBO form as part of their license renewal. The companies that are part of the UBO resolution are:

• Mainland or Onshore Companies
• Non-Financial Free Zone Companies

These companies follow processes and have acquired resources that make them distinct from the rest and they are:

• Shareholdings
• Subsidiaries
• Branch offices
• Direct and indirect ownership
• Ultimate owner

o   The actual and supposed, independent owner of the company

• Corporate group

o   Companies with the same owner 

What companies are not part of the UBO resolution?

Companies that are solely owned by a local, government body or are set up in the DIFC or ADGM financial free zones don’t belong to the UBO resolution since they have their own UBO disclosure requirements. They have a separate set of regulations that apply to companies incorporated in financial-free zones which are Abu Dhabi Global Markets (ADGM) and Dubai International Financial Center (DIFC).

What must be disclosed?

One register must be maintained for the UBOs and another register for shareholders/partners. If a company has trustees or nominees then it must include information about them and the shareholders and partners as well. As per the new UBO resolution, companies are required to update and maintain their registration with information about their beneficial interests. 

Who is part of the UBO register?

Ultimate Beneficial Owners (UBOs) are natural persons who ultimately own or control a legal unit or arrangement, such as a company, a trust, a foundation, or other entities on whose behalf a transaction is conducted. It includes those persons who exercise ultimate control over a legal person or arrangement. 

Over the years, UBO controllers have become more meticulous globally regarding the registration process by highlighting the need for transparency in the financial sector, and the stringency of law enforcement. As per the resolution, the UBO Register discloses the real beneficiaries of the company which are defined as:

• Natural persons
  • Own or control, directly or indirectly, at least 25% of the company’s share capital.
  • Hold at least 25% of the voting rights.
  • Have the right to appoint or dismiss most of the directors or managers.
• If no natural person satisfies the above criteria
  • A real beneficiary is a natural person who exercises control over the company by other means.
• If no natural person satisfies both the conditions above
  • A real beneficiary is a natural person who is responsible for the senior management of the company.

For each Real Beneficiary, the Register must include the following:

• Full name
• Nationality
• Date and place of birth
• Place of residence or notice address
• Passport or identification number
• Country of issuance
• Date of issue and expiry.
• The natural person’s reason to be identified as a beneficiary.
• The date the person became a Real Beneficiary
• The day the person ceased to be a Real Beneficiary (if applicable)

Shareholder/Partner Register

For each partner or shareholder register, the following must be included:

• The number and class of shares/equity held, and the voting rights attached to these shares.
• The date on which the shareholder/partner acquired the shares/equity.
• The natural persons as shareholders/partners with the same information required for a Real Beneficiary.
• Legal entities that are shareholders/partners: 
  • Name, legal form, and memorandum/articles association.
  • Address of main office or headquarters
    • For a foreign legal entity, the name, and address of its legal representative in the UAE
  • Names of the natural persons holding senior management positions
    • Passport or identification number
    • Country of issue
    • Date of issue
    • Expiry date

Trustees and Nominee Managers

The Shareholder/Partner Register must include information about the trustee or nominee manager that is the same as the Real Beneficiary. A trustee or nominee can be a shareholder or partner of a company or a person that is acting on behalf or as per the instructions of another person.

Authorized Disclosure

The authorized “discloser” must be a UAE resident and authorized to disclose to the licensing authority the information required by the UBO resolution which are the name, address, contact information, and ID copy of the authorized individual.

Reporting deadline

On October 27, 2020, the UBO resolution required companies to file the Register with their relevant licensing authority. Companies have to maintain and update their registers. If there is any change to the information, then it must be reported to the relevant licensing authority within 15 days.

Compliance measures

Apart from the exempt categories, Registers are necessary for all companies established in the UAE to ensure compliance. These companies need to compile updated information and create a file for the Registers. They have to carefully review and consider their ownership and control structures to properly identify their UBOs since most of them have internal agreements between shareholders or partners concerning control, rights, obligations, and management. This can affect who is considered the UBO under the resolution.

How to establish a UBO?

By employing the appropriate Know Your Customer (KYC) measures as part of the Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations, companies can establish the Ultimate Beneficial Owner (UBO) through:

• Due Diligence
  • Classification of information about the customers which includes their names, addresses of company directors, and company incorporation.
• Transaction Examination
  • Companies can identify shell companies through the examination of the transactions, especially unusual transaction patterns from high-risk countries.
• Agreements Assessment
  • Customers subject to international sanctions must be assessed for using shell companies to access financial services.
• PEP Inspection
  • Politically Exposed Persons (PEP), such as government officials, must be in accordance with AML measures to clear their PEP status.
• Negative Media
  • Customers that are involved in UBO-related money laundering activities need to have a news screening continually to establish credibility.

What are the penalties?

Under the UBO Regulations, the Mainland Companies and Non-Financial Free Zone Companies are required to submit complete information about their Ultimate Beneficial Owner (UBO) to the relevant authorities. The criteria to determine a UBO are set out in the UBO Regulations.

Since it’s necessary to declare the UBO, if the mainland and non-financial free zone companies are in breach of the UBO Regulations or are unable to submit their UBO information, then the Ministry of Economy has the right to impose penalties or fines of up to AED 100,000.

How can we help?

Our flexible solutions protect companies from potential risks and third-party fraud. We create risk-aligned strategies and provide insights for better decision-making processes and support businesses from different jurisdictions. We are transparent with our procedures and follow compliance regulations to fulfill all the requirements to be at par with the evolving financial landscape. By complying with due diligence and audit reporting laws, we fight financial corruption and bribery and create trusted relationships with our customers. 

As UBO registration is an important requirement for companies established in the UAE, EZONE has partnered with reputable financial firms to give you the right information on time. We save you from non-compliance penalties and provide you with the most suitable risk-management measures. Book a FREE consultation with us by calling us at 800-EZONEUAE or messaging us at setup@e.zone. Our consultants are ready to assist you with all your needs.

as of 09 November 2022

Why implement ESR?

On April 30, 2019, the UAE authorities enacted the Economic Substance Regulations (ESR) as a strong commitment to comply with the EU requirements of being removed from the EU’s list of “non-cooperative” tax jurisdictions. The government’s initiative to take this action highlights the nation’s strong efforts to protect companies against unsafe taxation practices that can affect their expansion and advancement in later stages.

What is ESR?

The implementation of ESR requires certain businesses to have substantial activities in the UAE.  With it, certain requirements are imposed on businesses that determine their economic activity in a country that is not driven by low or non-tax jurisdiction. Hence, preventing the destructive tax pattern of shifting the profits from a high-tax to a low-tax domain.

To further refine the ESR and reach the highest global standards set by the Organization of Economic Co-operation and Development (OECD), a new Economic Substance Regulation (ESR) was introduced by the Cabinet of Ministerial Resolution no.57 of 2020 with Ministerial Decision no.100 of 2020 which revoked the former regulations and the previous laws connected to it. With this updated law, companies that are conducting business inside the UAE are required to register as licensees.

What is the purpose?

As a result, all UAE businesses that may be subject to these amended regulations must be prepared to take action and ensure compliance. By providing the Notification to the regulatory authorities with complete information associated with the company’s Licensee and their relevant activities in the UAE within a reportable time.  The information provided for the Notification is a requirement for filing an Economic Substance Report. This will enable companies to abide by ESR, save on VAT, and also on import/export tax.

*The purpose of the Notification is to provide the Regulatory Authorities with certain initial information in respect of Licensees and their activities in the UAE for the relevant Reportable Period. The information provided as part of the Notification is a prerequisite to filing an Economic Substance Report for the same period (if required).

Who is subject to ESR?

ESR applies to any corporate entity, natural or juridical, incorporated inside of the UAE, that carries out the relevant activity. These companies can be part of a foreign multinational group or owned by a foreign shareholder and include:

•   Onshore Companies
•   Free Zone Companies
•   Limited Liability Companies (LLC),
•   Public Joint Stock Companies (PJSC)
•   Private Joint Stock Companies (PJSC)
•   Branches
•   Foundations
•   Non-Profit Organizations
•   Partnerships

For ESR, different forms of Licensee exist:

• A business that carries out one or more of the relevant activities during the fiscal year is called a Licensee.
• While other businesses that are exempted from certain requirements under the ESR are referred to as Exempted Licensees.
• Both, whether a Licensee or Exempted Licensee, must submit a Notification at a particular time.
• To have more information regarding the exemption and the requirements, businesses can refer to the notice of exemption.

Who is exempted from ESR?

The exempted Licensee does not have to fulfill certain requirements under the ESR, but they still have to file a Notification with documentary evidence to claim the exempt status. For a corporate entity to qualify for an exempted Licensee, it must:

• Have an investment fund/investment holding entities
• Be a tax resident in a jurisdiction outside the UAE.
• Be an entity that is solely owned by UAE residents

o   Not part of a multinational group.

o   Only business activities in the UAE.

• Be a branch of a foreign entity where the income is subject to tax in the jurisdiction of the foreign entity.

In the previous regulation, corporate entities that are directly or indirectly owned for an extent of 51% by the UAE government are not exempted from the current regulation.

What are the relevant activities?

The company has to file an ESR (Economic Substance Regulation) Notification if it undertakes one or more relevant activities during the Financial Year. The relevant activities include:

• Banking
• Insurance
• Investment Fund Management
• Lease and Finance
• Headquarter
• Shipping
• Holding Company
• Intellectual Property (IP)
• Distribution & Service Center

For more information and an explanation of each activity, companies can refer to the relevant activities Guide in Schedule 1 of Ministerial Decision 100 of 2020 issued by the Ministry of Finance.

How does ESR affect businesses?

Reporting requirements for each Licensee may differ between license types, kinds of activities, and the location of these companies. Certain procedures must be followed for the submission of these forms. Any failure by the Licensee to submit the Notification on time or qualify for the Economic Substance Test may result in the imposition of penalties and sanctions, depending on the nature of that failure.

How to comply with the ESR requirements?

Licensees and exempted Licensees that are operational and acquiring income from one or more relevant activities in the UAE need to submit a Notification with the date of commencement and end of the financial year to the applicable regulatory authority as set out in the ESR.

Within 6 months from the end of the Licensee’s financial year, the Notification must be filed electronically to the Ministry of Finance Portal. The corporate entities that have already submitted their Notification to their Regulatory Authorities for the financial year 2019 are required to re-submit their Notification on the Ministry of Finance portal. The deadline for the submission will be disclosed by the authority in charge.

The corporate entity will need to present an Economic Substance Return report to the regulatory authority to disclose its substance annually and qualify for the “Economic Substance test” within 12 months from the end of each financial year.

For companies that are at least 51% directly or indirectly owned by an Emirate or federal government agency or are a UAE government body or authority itself, an exemption is applied. A proper structure needs to be in place that meets the Economic Substance requirement for companies that go through the process. To meet the Economic Substance Test, corporate entities must satisfy the following criteria

•  Manage and direct the company related to their relevant activity.
• Conduct income-generating activities.
• Supervise the appropriate number of qualified full-time employees.
• Handle a sufficient amount of operating expenditure.
• Hold adequate physical assets for the function of the company.

The new ESR regulations permit corporate entities to outsource certain functions to third-party service providers. The companies should ensure that they can regulate and oversee outsourced activities.

Specific regulations are in place for holding companies whose profits and income are garnered from equity investments. A holding company in the UAE is subject to less rigorous Economic Substance requirements. For high-risk IP-related activities in the UAE, additional requirements are put in place.

What needs to be reported?

Specified information on the ‘Relevant Activities’ must be reported annually to the appropriate authority who has issued the company’s trade license to determine that the report is in line with the Economic Substance requirements which include:

• Information on the relevant activities
• Nature of business
• Amount of revenue
• Company expenditure
• Location of company
• Number of employees

What are the Notification dates for ESR?

The corporate entities that have fulfilled the Economic Substance requirements can report to the Ministry of Finance. For the company to comply with the ESR:

• Existing corporate entities will have to submit the Notification from April 20, 2019, onwards, with the first return due in 2020.
• New corporate entities need to submit the requirements upon the receipt of their trade licenses, with the first return due in 2022.

How to send the Notification?

The Notification must be submitted electronically to the Ministry of Finance (MOF) and all the fields in the Notification are mandatory to fill unless stated as optional.

How many Notifications can be sent?

The submission of Notification is dependent on the type of company, the form of business, the economic activity, and the kind of Licensee.

• If the business carried out a relevant activity for part of the year, then it is still required to file for Notification and report all relevant activities undertaken during the Financial Year.
• If a business has multiple Licensees, then each Licensee must file a Notification on a stand-alone basis, whether the Licensee is part of a consolidated group for accounting or not.
• If the business has a branch in the country and must file a Notification, then the UAE head office or parent company can file a single consolidated Notification that incorporates all the details of the branches that carry out the relevant activity.

What is the deadline to file for ESR?

The ESR Notification must be filed within 6 months from the end of the Licensee’s financial year.

What happens if the Licensee has failed to comply?

If a business had failed to fulfill the requirements of ESR on time, then significant amount of fines are imposed by the Federal Tax Authority which include:

• Failure to file Notification on time – AED 20,000
• Providing inaccurate information – AED 50,000
• Failure to submit substance report – AED 50,000
• Failure to fulfill Economic Substance test – AED 50,000
  • Suspension, revocation, or non-renewal of the license: AED 300,000
  • Failure to comply for the second consecutive year: AED 400,000
    • The penalty amount is increased every year which entities and activities are within the scope of the revised Economic Substance rules and/or

What are the authorities under the ESR?

• National Assessing Authority
  • The UAE Federal Tax Authority is appointed as the National Assessing Authority that is responsible for:
    • The assessment of Licensees and Economic Substance tests
    • The injunction of administrative penalties for non-compliance
    • Evaluate and conclude on the appeals filed by Licensees.
• Regulatory Authority
  • The Regulatory Authorities have the main responsibility to gather, organize, and verify the information of the Licensees and help the FTA in performing its role as the National Assessing Authority.
• Competent Authority
  • The Ministry of Finance is the competent authority to disclose the necessary information to foreign competent authorities.

How can EZONE assist you?

EZONE has created exceptional partnerships that can provide a complete array of services connected to bookkeeping, accountancy, auditing, payroll, VAT, banking facilities, ERP selection, business planning, and cash flow forecast to a diverse range of clientele from personal entities, and SMEs to MNCs. Our expert team of affiliates is ready to assist you with the following:

A. Initial Assistance

• Recognizing if the business is within the scope of ESR

B. Comprehensive Assessment and Gap Analysis

• Analyzing if the business is subject to the Economic Substance Test.
• If they are subject then an assessment will be done which will determine if the business operations across all emirates, onshore/ free zones, are currently expected to meet the requirements of the regulations.

C. Compliance Assistance

• Evaluate if the company is a Licensee conducting relevant activity during the reportable period.
• Classifying the compliance requirements for the company.

D. Implementation to meet Economic Substance Test

• Recommending solutions to comply with the Regulations
• Ensuring the implementation of the corrective or preventive corporate measures to fulfill the requirements of the Economic Substance Test
• Preparing submitting the Notification and the report for submission with the Ministry of Finance.

From the preparation of any documentation, and the review of information to the submission to the significant authorities, we can help you with the filing and refiling of the Notification and Economic Substance Return with the Ministry of Finance. We can provide you with continuous assistance and assessment services to ensure that there is ongoing compliance with the ESR.

With EZONE, you don’t have to worry about any unwarranted risks. ESR Assessment is essential for your business. Save your time and money. Call us at 800-EZONEUAE or message us at setup@e.zone and book a FREE consultation with us.

A Global Business Hub 

Dubai’s strategic location midway between the East and the West provides opportunities for international trade to flourish and for people to move easily across countries.

Tax Incentives 

The UAE’s government offers attractive tax incentives to companies doing business in the country. There are currently no foreign exchange controls, trade barriers, and no personal or corporate taxes.

Multiculturalism & Diversity

There is a very large expatriate community in the UAE with a fusion of over 200 nationalities that live together in diversity and respect, giving businesses access to an incredibly talented and creative workforce. 

Safety & Security 

Dubai’s ranking of 1st on 11 indicators on Personal Safety in the Safe Index validates its commitment to prioritize the safety and security of its residents and tourists alike. 

Ease of Doing Business 

The UAE is ranked number 1 regionally and number 10 globally among 190 economies in the Ease of Doing Business Index. 100% full foreign ownership on mainland companies and a variety of over 40 free zones encourage and support investment across all industries.

Modern Infrastructure 

Not only is Dubai dominated by architectural landmarks, it is also home to the world’s busiest airport and most advanced roads and transportation infrastructure. Moreover, Dubai’s advanced technological infrastructure and high innovation levels are central to its attractiveness.

Equal Opportunity

The UAE Constitution encourages equality, freedom, respect, and nondiscrimination which is why it is a nation of tolerance. No matter what your race, nationality, religion, or beliefs, as long as you have the grit and perseverance, you can achieve success. 

Quality of Life

Being an expatriate living in a country with a booming economy, constant economic expansions, and unlimited opportunities for business offers a potential for an unprecedented lifestyle. 

The government’s unparalleled support backed by a combination of a clear vision and wise leadership pertaining to the development of the nation’s business environment has further encouraged entrepreneurs looking to invest in Dubai’s thriving economy. 

If you’re looking to expand your business or are looking to start a new venture in the United Arab Emirates – Congratulations! Your Business Matters to us, so our Business Setup Advisors at EZONE are available for any questions or direction you may require on this business journey. 

Book your FREE Consultation Now!