Strict compliance to ESR requirements in UAE
The UAE adopted new Economic Substance Regulations in Cabinet Resolution No. 31 of 2019. These regulations iterate that a company engaged in relevant activities must have sufficient economic substance in the territory to access the territory’s tax regime. The changes were in response to pressure from the European Union (EU) and apply for financial years starting from January 1, 2019.
The relevant activities under Economic Substance Regulations are:
Banking, insurance, shipping, lease-finance, investment fund management, intellectual property, headquarters business, holding company business, and distribution and services.
In August 2020, the UAE Cabinet of Ministers revoked the original resolution of 2019 and issued a revised regulation through Cabinet Resolution No. 57 of 2020 with updated guidance clarifying the amended ES Regulations. The Resolution was issued in consultation with the Organization for Economic Cooperation and Development (OECD) and the European Union (EU). The UAE Federal Tax Authority has been appointed as the National Assessing Authority to oversee compliance and control of the New ESR.
According to the resolution, the definition of a Licensee was amended to be limited to juridical persons and unincorporated partnerships that are registered (whether by way of commercial/trade license or other form of permit) to carry out a Relevant Activity. Natural persons, sole proprietorships and other business forms that are not juridical entities are no longer within the scope of ESR.
The UAE’s amended ESR (Economic Substance Regulations) has classified entities into ‘licensee’ and ‘exempted licensee’ to carry out relevant activities. The licensees must file ESR reports along with documents to avoid penalties. However, exempted licensees need to file notifications only, along with documents to substantiate their exempt status.
Click here to visit ESR Guide and FAQ page.
- If an entity fails to provide sufficient evidence to substantiate its exempted licensee status, it will be assumed as a licensee and will have to meet the Economic Substance test and file the report.
- It is also possible that if an entity is not subject to ESR in one year, it may be subject in the subsequent years. This requires businesses to assess their ESR status every year. The amended law is clear that one must look beyond the trade license and the MoA (Memorandum of Association) while assessing ESR applicability.
- It means an entity not carrying out relevant activity as per the trade license. Say, a chain of supermarkets that may be subject to ESR if it provides loans to group companies with or without interest. Also, an entity engaged in trading of electronics may be subject to ESR if it purchases goods from its foreign group company and sells in the UAE or outside.
The five categories of exempted licensees are required to file documents to substantiate their status:
- The exempt licensee must be wholly owned by a UAE national or UAE resident but is not part of a multinational group. Also, the licensee must only have operations in the UAE.
- They must provide a shareholder register, structure chart, proof of nationality and/or residency of shareholder(s) and copy of financial statements.
- An investment fund is required to file a copy of statutory documents, copy of the PPM/information memorandum, investment fund’s license and registration (for a fund established in a jurisdiction outside the UAE).
- A special purpose vehicle (SPV) or holding company of an investment fund should submit a structure chart of the fund and its subsidiary investment entities. Or evidence of the investment fund status of the fund that has incorporated the UAE entities.
- An entity resident outside the UAE should submit details of the country in which it claims to be a tax resident, tax identification number of that country, and a letter or certificate of an assessment to corporate income tax and evidence of its payment.
- A UAE branch of a foreign company and all its income are subject to tax in the jurisdiction of that foreign company. Then, it should submit details of the country in which the parent company is resident, tax identification number issued by the foreign tax authority and copy of the tax returns.
Companies in UAE need to comply with the UAE’s Economic Substance regulations (ESR), if not they have to bear heavy fines for their failure to do so.
- Failure to provide notification and relevant documentation will result in a Dh 20,000 fine.
- Providing inaccurate information will result in a Dh 50,000 fine.
- Failure to submit an ES report would attract a fine of Dh 50,000 in the first year, Dh 400,000 in the second consecutive year. You might also face the suspension or non-renewal of your license as additional penalties.
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*Inputs from gulfnews.com/business/analysis/knowing-the-ins-and-outs-of-uaes-esr-laws