Insights

Economic Substance Regulation (Updates)

The UAE introduced Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019) on 30 April 2019 in line with its commitment as a member of the OECD Framework on Base Erosion and Profit Shifting (BEPS), and to make the UAE tax framework align with the requirements of the EU to excluded UAE from the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist).

As we all know the ESR objectives are to determine the operational reality of the UAE entities undertaking Relevant Activities in the UAE while performing predefined test enlisted under the regulation.

Economic Substance Regulations provide two types of compliances for the UAE entities undertaking Relevant Activities;

1. Filling of Notification &
2. Filling of Annual Report

On 10 August 2020, Ministry of Finance (MOF) has issued Cabinet Resolution No. 57 of 2020 and on 19 August 2020 Ministerial Decision 100 of 2020, which repeals and replaces the existing ES Regulations. The UAE businesses should take a note of the amendments to reassess the implications relating to ESR Compliance. This amendment will apply retrospectively from 1 January 2019.

Following are the main amendments in the ESR

Extended Scope of ESR

• Amended ESR covers Juridical Persons or Unincorporated Partnerships and excluding Natural Persons (i.e. Sole Proprietors)
• Provide categories of licensees which have been specifically exempted from the ESR (a) investment funds, (b) a licensee that is tax resident in a foreign jurisdiction, and (c) a UAE branch of a foreign entity if the branch’s income is taxed in a foreign jurisdiction.
• All exempted licensees are required to submit only the ESR notification along with sufficient evidence substantiating its status as an Exempted Licensee.
• Branches registered in the UAE are regarded to be an extension of their “parent” or “head office” and are not considered to have separate legal personality.
• Branch of a foreign entity registered in the UAE that carries out a Relevant Activity, income of which taxed in UAE, is required to comply with the ESR Regulations.

Change in scope of Relevant Activities

• Distribution Business: – Widen the scope of distribution business now it covers purchasing of goods from a foreign-connected person and selling it locally or outside UAE (without importing into the UAE). All the transaction in the nature of “Bill to-Ship to” or High Sea Sales would now be covered under the ESR.
• Service Centre Business: – Widen the scope of Service Center Business while removing the words “in connection with the foreign group company’s business outside the UAE”. Now it will also cover services to be provided in connection with the foreign group company’s business in the UAE.
• Lease Finance Business: – Following terms have been deleted from the FAQ definition of Lease Finance Business “Renting assets, equipment or any other good to another person for consideration”.
• Holding Company Business: – Scope of Dividend is widened to include share of profit in its ambit.

NATIONAL ASSESSING AUTHORITY

• Federal Tax Authority (FTA) has been appointed as the ‘National Assessing Authority’ which will undertake ESR Assessments, Administrative Penalties, Appeal Process and other prescribed functions. Ministry of Finance will launch an online platform for re-submission of ESR notification and submission of Annual Reports and other documents.

Compliance

• ESR notification must be submitted within 6 month from the end of the financial year of the licensee.
• ESR Annual Report must be submitted within 12 month from the end of the financial year of the licensee.

Penalty

• Failure to submit Notification on or before the due date- AED 20,000
• Penalty for providing inaccurate information- AED 50,000
• Failure to submit Economic Substance Report or failure to meet the Economic Substance Test – AED 50,000 (First time default), AED 400,000 (Subsequent default) and possible cancellation/suspension of trade license.