On the 23 February 2024, the United Arab Emirates was de-listed from the Financial Action Task Force (FATF) ‘grey list’ after its inclusion in March of 2022. The UAE had committed to rapidly resolving the identified strategic deficiencies within the designated period of increased monitoring by FATF, which followed its 2022 decision. The country’s commitment in recent years to enhancing the UAE’s financial and legal framework has resulted in a changing compliance landscape, with implications for not only those operating within the UAE, but also for the broader international investment community. 

This period of change has ushered in a host of regulations and improved policies which individuals and corporations are obliged to follow. Unsurprisingly, this has been matched by an increase in enforcement activity. Below we highlight some key compliance requirements which companies operating in the UAE must observe to.

Ultimate Beneficial Owner (UBO) filing requirements

One of the authorities’ primary concerns is establishing who the Ultimate Beneficial Owner (UBO) is with respect to all entities in the UAE. This particularly applies to those employing intricate structures with numerous layers of ownership, or those ultimately owned by a foundation, trust, or private equity firm. Identification of the key stakeholders in, and powers behind, an entity has become a priority.

Consequently, Cabinet Resolution No. 109 of 2023 (which came into effect on 16 November 2023) was introduced, replacing Cabinet Resolution No. 58 of 2020, in relation to the regulation of Real Beneficiary Procedures (the Onshore UBO Law). 

This enhanced Onshore UBO Law was regarded as a significant step forward in relation to identifying UBOs due to its particular focus on demanding transparency in complex corporate structures in order to support the UAE’s fight against financial crime. All entities, other than those in financial freezones and government entities and their subsidiaries, are required to uphold a shareholders’ register, a register of beneficial owners, and, if applicable, a register of nominee directors. There is also an emphasis on a risk-based approach, ensuring that the Registrar is empowered to direct its focus where it is most needed rather than burdening lower risk entities.

Furthermore, Cabinet Resolution No. 132 of 2023 outlines administrative penalties for any breaches of the Onshore UBO Law. These measures range from warnings for first time violations up to fines of AED 100,000 and the potential suspension of trade licences. 

The financial freezones in the UAE, being the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM), also have UBO regulations in place. DIFC’s UBO regulations were brought into force in 2018. More recently, in October 2023 the ADGM released amendments to its 2022 Beneficial Ownership and Control Regulations, which have included enhancements such as clarifying the cascade approach for identifying UBOs of ADGM entities (in line with FATF and the Organisation for Economic Co-operation and Development (OECD) recommendations). This was further clarified by an amendment released in February 2024, which has resulted in the ADGM passing a ‘no-action’ position for all entities completing and updating beneficial ownership and control information until 30 June 2024.    

Economic Substance Regulations (ESR)

The UAE is a member of the OECD Inclusive Framework on BEPS (base erosion and profit shifting). This has resulted in the issuance of the Economic Substance Regulations (Cabinet Resolution No. 31 of 2019, subsequently replaced by Cabinet Resolution No. 57 of 2020) as part of the BEPS regime, which aims to combat tax avoidance, enhance international tax rules, and create transparency around tax frameworks.

The ESR requires both onshore and freezone companies and certain other businesses that carry out any of the defined “Relevant Activities” to maintain and demonstrate adequate economic presence in the UAE via certain filings with the Ministry of Finance. The objective of the ESR Regulations is to ensure alignment between reported actual profits and the level of economic activities undertaken in the UAE. 

Relevant Activities under the ESR include: 

• Banking Businesses
• Insurance Businesses
• Investment Fund Management Businesses
• Lease-Finance Businesses 
• Headquarters Businesses
• Shipping Businesses
• Holding Company Businesses
• Intellectual Property Businesses
• Distribution and Service Centre Businesses

An entity must assess, in each financial period, whether it has undertaken Relevant Activities. If so, the entity is required to demonstrate that:

1. the entity’s Core Income Generating Activities are conducted in the UAE; 
2. the entity and the Relevant Activity are being directed and managed in the UAE; and
3. there are adequate levels of operating expenditure, employees and physical assets in the UAE.

The Federal Tax Authority is appointed as the National Assessing Authority and determines whether an entity meets the Economic Substance Test, imposing administrative penalties if and when necessary. Failure to submit the notification will result in a fine of AED 20,000 and failure to submit a report (if applicable), may result in a fine of AED 50,000. Entities which fail to demonstrate adequate economic substance may face escalating fines of up to AED 400,000, and possible licence suspension or withdrawal for repeated violations.  

Conclusion

Failure to adhere to the above regulations and compliance requirements has resulted in regulatory enforcement action, sanctions, termination of business and subsequent difficulties in obtaining banking facilities. Entities undertaking business in the UAE must keep a watchful eye on all regulatory requirements to mitigate the risk of non-compliance and ensure business continuity. 

Horizons & Co. has experienced corporate and commercial lawyers with extensive knowledge and expertise in relation to the UAE legal and regulatory framework. We advise individuals and companies on their compliance obligations, best practices in the region, and provide comprehensive guidelines on the implementation and maintenance of minimum mandatory requirements to ensure businesses maintain integrity and legitimacy in their operations.

For queries in relation to your compliance obligations in the UAE, please contact our team.

Authors :

• Bridget Butler

Partner 

Contact phone: +971 50 708 5066   

• Jeffy Cruz

Senior Associate