ESRAddressOffice No. 208, Rawdat Al Wasl, Buiding Business Bay, Dubai

Phone Number+971 (0)50 5302603

Email Addresssales@aaconsultancy.ae

www.aaconsultancy.ae

THE COMPLETE GUIDE

COMPLETE GUIDEFOR ESRAs a part of UAE’s commitment as a member of OECD inclusive framework, it introduced a Resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the 'Regulations') on 30 April 2019.

Recently, the Ministry, in an attempt to revamp the Erstwhile Regulation has issued an amended Regulation (vide Cabinet Resolution No 57 of 2020) and guidance (Ministerial Decision No 100 of 2020)

The Regulations require UAE onshore and free zone companies and certain other business forms that carry out certain activities to maintain and demonstrate an adequate “economic presence" in the UAE relative to the activities they undertake. The purpose of the Regulations is to ensure that UAE entities report actual profits that are commensurate with the economic activity undertaken within the UAE.

WHEN DO REGULATIONSENTER INTO FORCE?These amendments redefine the scope and administration of the Economic Substance regime in the UAE, subject to a retrospective effect from 1st January 2019.

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WHO IS SUBJECT TO THE REGULATIONS?A company or licensee who is a juridical person; or an unincorporated partnership registered in the UAE, including Free Zone and Financial Free Zone and carries on a Relevant Activity.

The Regulations apply to Licensees that carry out any of the following Relevant Activities.

CHANGES IN DEFINITION AND TREATMENT

Treatment of branches

Earlier, the Regulation required the entire licensees (including branches) who have undertaken Relevant Activity to comply with the Regulation.

The amended Regulation clarifies the compliance requirement for UAE as well as foreign branches as under:

UAE branch of UAE entity – It is merely an extension of 'parent' or 'head office' and, therefore, not considered as a separate entity for this Regulation.

Foreign branch of UAE entity - UAE entity is not required to consolidate activities/income of foreign branch for ESR provided that the income of such branch is subject to tax outside the UAE. In this context, the branch includes a Permanent Establishment or any other form of taxable presence for corporate income tax purposes.

UAE branch of a foreign entity - It is clarified that such an entity is required to comply with Regulation unless the Relevant Income of such branch is subject to tax outside UAE.

Banking Businesses

Insurance Businesses

Investment Fund Management Businesses

Lease-Finance Businesses

Headquarter Businesses

Shipping Businesses

Holding Company Businesses

Intellectual Property Businesses

Distribution and Service center

Businesses

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Assess whether an entity has met the ES Test. Impose administrative penalties. Hear and decide on appeals. Carry out reporting requirements. Exercise any other powers or functions as required in implementing ESR.

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Exemptions

Earlier, licensee owned (more than 51%) by Federal or Emirate Government, directly or indirectly, were exempt from Regulation. This exemption has been removed by the New Regulation.

Additionally, the amended Regulation has enlarged the exemption to the following categories:

Investment Fund. A company that is a tax resident of a country outside the UAE. A licensee who is completely domiciled in the UAE (not part of a MNE group and no cross border activities). Branch of a foreign entity which is taxed outside the UAE.

However, the exemption to the above categories will be applicable only upon submitting evidence to fulfill the conditions prescribed for exemption.

Connected Persons

An entity - part of the same group as the entity or an exempted entity.

Group

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

Administration

Ministry of Finance has appointed Federal Tax Authority as the "National Assessing Authority", responsible for enforcing compliance of ESR which include.

Furthermore, MOF has also redefined or clarified terms such as UAE Residents, ParentCompany, Ultimate parent Company, MNE group, Relevant Income, Consolidated Financial Statements, Unincorporated Partnership etc.

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Distribution and Service Centre Business

Purchasing from a Foreign Connected Person and importing and storing in the State: component parts or materials for goods; or goods ready for sale, and reselling such component parts, materials or goods outside the State–Providing services to Foreign Connected Persons in connection with a business outside the State .

Buying from a foreign related person, components of parts, materials for goods or commodities ready for sale and re-sale of these components or goods. Providing services to foreign related persons.

The updated definition of the Distribution and Service Centre Business in the New ESR excludes the reference to ‘import and store the goods in the UAE’. Therefore, if a UAE entity is purchasing and selling goods but the goods do not physically enter/are stored in the UAE, the entity would be considered conducting an RA.

Moreover, the reference to ‘in connection with a business outside the UAE’ has been removed from the definition of the Distribution and Service Centre Business in order to widen the coverage of services provided from a UAE entity to a foreign related party.

High-Risk Intellectual Property Licensee

The New Regulations have provided much-needed clarity on this relevant issue, which is at the center of profit shifting in most cases – the intangible-related transactions.

The New Regulations have now clarified that a licensee would be covered under the Regulations if it derives income from licensing or selling of an intellectual property to a foreign-related party. Also, if such an intellectual party was previously acquired from Connected Person or in consideration for funding research and development by another person situated in a foreign country.

Lease- Finance Business

A UAE entity is considered engaged in a lease-finance business if it offers credit or financing for any form consideration.

Cash Pools are now considered as Offering credits or financing now includes Cash Pool arrangements.

OTHER SIGNIFICANT CHANGESNotification - must be submitted within six months from the end of Licensee's or Exempted Licensee's end of Financial Year. Licensees that have already submitted their notification directly to their Regulatory Authority will have to re-submit via the Ministry of Finance portal once available.

Licensee - may outsource activities which are not CIGAs to outside the UAE, e.g. outsourcing of back-office functions, IT, payroll, legal services, or other expert profes-sional advice or specialist services provided.

Board Members - not required to be UAE residents but are required to be physically present in the UAE when taking the decisions and minutes of the Board Meetings must be recorded.

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Holding Company Business

An entity is considered to be engaged in Holding Company Business if:

Its sole function is the acquisition and holding of shares or equitable interests in other companies; and Only earns dividends and capital gains from its equitable interests.

“Dividends” has now been defined to mean any distribution of profits to the holder of shares or equitable interest in another company or incorporated partnership.

Further, if real estate assets are used only for holding company business, and no other income is generated out of such assets, then the said entity would still be regarded as Holding Company Business.

ES notification

Licensees were required to file the Notification with the respective Regulatory Authority at the time and format specified by the respective Regulatory Authority.

All Licensees regardless of whether they are exempt, are required to file a notification electronically on the MOF portal within six months from the FY end.

Licensees that have already submitted a Notification directly to their Regulatory Authorities are required to re-submit a notification in accordance with the provisions of the New ESR at the MOF Portal once available.

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Failure to notify/filing inaccurate particulars

10000 to 50000 20000

Failure to meet substance test (First Year)

10000 to 50000 50000

Failure to meet substance test (Subsequent Year)

300000 400000

Penalties

The amended Regulation has increased the administrative penalty in certain offenses. We have summarized the administrative penalties as under:

Additionally, in certain cases, the penalty included sharing of information with foreign competent authority as well as suspension/cancellation of license.

Offense As per originalRegulation (in AED)

As per amendedRegulation (in AED)

Timeline of Economic Substance Regulation

Notification must be submitted within six months from the end of Licensee's or Exempted Licensee's end of Financial Year. Licensees that have already submitted their notification directly to their Regulatory Authority will have to re-submit via the Ministry of Finance portal once available.

ESR reports will have to be submitted within 12 months, following the end of the licensee's financial year-end.

Documents required for ESR

Audited Financial statement for the relevant period.

Corporate documents.

List of Employee.

Lease agreements.

Details of activities Outsourced to third parties & details of each

Outsourcing provider, if any.

Details of Ultimate Beneficial Owner / Ultimate Parent Company.

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ESR Notification filing with UAE Ministry of Finance.

Companies not generating revenue during a financial year from any of the "Relevant Activities" need to file the ESR Notification only.

Pricing details

Package

Proposed Fees

AED 3,000 + VAT

ESR Notification & Report filing with UAE Ministry of Finance.

Package

Proposed Fees

AED 5,000 + VAT

Package

Proposed Fees

AED 10,000 + VAT

Audit of Financial statements for the relevant period.

ESR Notification & Report filing with UAE Ministry of Finance.

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AddressOffice No. 208, Rawdat Al WaslBuiding Business Bay, Dubai

Phone Number+971 (0)50 5302603

Email Addresssales@aaconsultancy.ae

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