UAE (ESR) update, The UAE published its first Economic Substance Regulations (ESR) in April 2019. Until June 30, 2020 all companies registered in UAE have fulfilled one of their obligations, but now there has been a new notification is issued with few more amendments to it. For that UAE has issued a release on cabinet Resolution No. 57 concerning Economic Substance Regulation.

The Major Amendments are as follows:

UAE (ESR) Revokes the previous regulations, Guidance and clarifications issued by the Authority

The UAE Cabinet of Ministers revoked the original Cabinet Decision No. 31 concerning Economic Substance Regulations (ESR) after consultation with Economic Co-operation and Development (OECD) and the European Union (EU). A few set of Amendments has been released which is issued by way of Cabinet Resolution no. 57 of 2020, dated 10^th August 2020 which was followed by Ministerial Decision No. 100 of 2020, dated 19^th August, 2020 as a supplementary guidance with an updated Relevant Activities Guide.

The new regulations are enforced on all licensees in the UAE from 1^st January, 2019 onwards retrospectively. With Amendment in ESR all licensees carrying the relevant activities are required to re-file notification that was filed for Financial year 2019 (original due date 30^th June 2020) through the MOF’s portal once goes live.

The ESR reports need to be uploaded on the same portal within 12 months following the end of the licensee’s financial year end.

New Definition of Licenses and Exempted Licenses, ESR is only applicable to Licensees.

Definition of Licensee:

An entity that is a juridical person (incorporated inside or outside the State) or an unincorporated partnership, registered in the state, including Free Zone and carries on Relevant Activity.

Judicial person has a separate legal personality from its owners. Hence, Natural Person, Sole Proprietorship, A Trust and A Foundation are excluded from the definition of Licensee. Unincorporated partnership forms of partnership that may operate in the UAE without having separate legal personality e.g. Joint Venture.

Exempted Licensees

• A licensee that is tax resident outside the UAE
• An Investment Fund and its underlying SPVs/Investment holding entities
• A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE
• A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction
• A license with 50% or more share capital by a state/federal government or department is now NOT EXEMPTED.

Amendment in the definition of connected person, group and relevant Income.

Connected Person

Connected Person means an entity that is a part of same group as the licensee or exempt licensee.

Group

Two or more entities are related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purpose under the accounting standards applicable.

Relevant Income

Relevant Income means all gross income from a relevant activity that is recorded in the books and records of the licensees or the exempted licensee under the accounting standards applicable thereto.

Treatment of Branches

UAE Branch of a UAE Company

As branches do not have separate legal personalities from their head office, Branches registered in the UAE of a UAE parent entity need to file single notification and a single economic substance report relation to the relevant activities of it and all its UAE Branches.

Foreign Branch of a UAE Company

UAE Licensees are not required to report or show substance in the UAE related to any relevant activity that its foreign branch, provided that foreign branch is subject to all taxes from its foreign jurisdiction.

UAE Branch of Foreign company

If the relevant Income is subject to tax in the foreign head office/parent jurisdiction then UAE Branches of a foreign entity is not Subject to ESR. New National Assembly Authority- Federal Taxation Authority

Under this New resolution , The UAE Federal Authority (FTA) has been appointed as a National Assessing Authority for the purpose of UAE Economic Substance Regulations. FTA will be primarily responsible for assessing whether the Emirati establishments and companies have met the requirements of the economic substance test. The Authority will be responsible for the collection and verification of information regarding their Licensees and shall assist the FTA in carrying out its role as the National Assessing Authority.

New Portal for re-notification/notification and reporting.

All Licensees carrying out relevant activities are now required to identify their notifications/report jurisdiction in which the parent company, ultimate parent company and ultimate beneficial owner claim to be tax Resident. The Licensees are required to submit the copy of Financial Statements while submitting Economic Substance Report. All notifications has to be filed within 6 months after the financial year end on MOF’s portal.

Relevant Activities

Holding Company

• It is a business that has sole function the acquisition and holding of shares or equitable interests in other companies;
• Only earns dividends and capital gains from its equitable interests.
• Now, minority holding also considered, where the sole function of the company is holding shares/equitable interest in other company.

Distribution Business

A center that involves in any of the following Businesses.

• Purchasing from a foreign connected person component arts or materials for goods; or goods ready for sale; and
• Reselling such component parts, material or goods
• Drop shipments are now included
• Sale to UAE are also included

Service Center

Providing services to foreign connected persons (In connection with business outside the state has been removed from the definition).

Intellectual Property Business

A UAE Business is regarded as carrying on an intellectual Property Business if it holds, exploits, or receives, gross income from “Intellectual Property Assets”. An Intellectual Property Asset is defined as any Intellectual Right in Intangible Assets, such as copyrights, patents, trademarks, brands, and technical know-how,, from which the Licensee earns separately identifiable income in the form of royalties, license fees, capital gains, and any other income from the sale or exploitation of the intellectual Property Asset.

Penalties

• AED 50,000 for failure to submit report or failure to meet the requirements of the tests in the first year
• AED 400,000 for failure to submit report or failure to meet the requirements of the tests in the second year
• AED 50,000 for providing inaccurate information to the RA or FTA
• AED 20,000 for failure to submit a notification
• License annulment for persisted non-compliance.

Please click here to read the official article.

Please click here to read article on major amendments in the UAE tax litigation.

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