In UAE, tobacco and tobacco products, Energy Drinks and Carbonated drinks are subject to Excise tax and the nation has now decided to levy excise tax on all e-cigarettes, e-liquids and sweetened drinks with effect from December 1, 2019. With this introduction a substantial change to businesses that import, manufacture or trade these products is expected. This article intends to explain the new scope of excise tax and what businesses should do.

Healthy lifestyle has always been a top priority for the UAE government and with this initiative, control over diseases arising from the consumption of harmful goods can be expected. According to the Cabinet General Secretariat “The decision comes to support the UAE government’s efforts to enhance public health and prevent chronic diseases directly linked to sugar and tobacco consumption.”

New Products that will be levied excise tax w.e.f. December 1, 2019

• Electronic smoking devices and tools and
• Sweetened drinks

ELECTRONIC SMOKING DEVICES AND TOOLS

Electronic smoking devices and tools shall include all electronic smoking devices and tools and the like, whether or not containing nicotine or tobacco. which would be classified on import under Customs HS codes:- 85437031, 85437032, 85437039

All liquid used in electronic smoking devices and tools used in such devices even if they contain nicotine or not will be levied tax under Customs HS codes:-  38249999.

Liquids used in electronic smoking devices and tools will be charged 100 percent tax.

SWEETENED DRINKS

Sweetened drinks that come under excise tax include any product to which a source of sugar or sweetener is added and is produced either as:

• A ready to drink beverage or
• Concentrates, powders, gel, extracts or any other similar product that can be made into a sweetened drink

Source of sugar includes white sugar, soft white sugar, powdered sugar, soft brown sugar and glucose syrup. Whereas sweeteners include saccharin and its salts, aspartame, sorbitol, and neotame.

Sweetened drinks that are excluded from Excise Tax

• Ready to drink beverages that contain at least 75% milk or its substitutes
• Baby formula, follow up formula or baby food
• Handling of Foods for Special Medical Purposes
• consumed for special dietary needs
• Beverages which include alcohol

What Business Needs to do

The Federal Decree-Law No. 7 of 2017 on Excise Tax stipulates that businesses/ persons that are engaged in any of the below activities must register for tax;

• Importing of excise goods;
• Production of excise goods;
• Releasing goods from an excise tax designated zone;
• Stockpilers of excise goods, in certain cases; and
• Warehouse keepers, in certain cases.

Hence accordingly Importers, producers, stockpilers warehouse keepers, etc. of electronic smoking devices, liquids used in such devices and sweetened drinks need to register for excise tax system as soon as possible. Failure in registering within the specified time period can lead to fines and various other obstacles.

Stockpilers are that businesses that holds excise stock on which duty is not paid and it’s available for free circulation in UAE and intends to be sold in UAE and holds “Excess excise goods”. FTA has a prescribed method to calculate excess excise goods and their valuation. Most of the supermarkets and retailers may fall under this category.

A step-by-step guide for businesses concerned

• Classification of Goods – Identify the Excise Goods
• Identify the primary conditions for registration as an Excise Tax Taxable Person and if applicable, as a Tax Warehouse and Tax Warehouse Keeper
• Identify the tax trigger points and the tax liability for flow/transaction after going through the supply chain flows/transactions with regard to the Excise Goods
• If there is any additional excise tax during the transitional period, this must be calculated.
• Evaluate the pricing impact across the supply chain
• Valuation for Excise tax
• ERP and process readiness

Jay Krishnan
Partner
jk@hlbhamt.com

Harish E
Manager, Tax
harish@hlbhamt.com

World Logistics Passport

The world logistic passport is the recent initiative by the government of UAE, which is a part of the implementation of the first phase of the Dubai Silk Road strategy. It offers certain operational and financial advantages to businesses, specifically the ones into shipping.

The passport aids in connecting government bodies, such as Dubai Customs and Dubai Trade, with logistics service providers like DP World and Dnata, and it also eases the process of commercial transactions among different authority bodies in the city.

With the passport, Dubai’s products, services and integrated transportation systems will witness a rise in its demand. It will also enhance the roles played by Dubai customs in trade, regional as well as global.

According to Sheikh Ahmed bin Saeed Al Maktoum, President of Dubai Civil Aviation Authority, said, “Dubai’s sophisticated logistics services will further enhance its value offering for investors and businesses by saving time and effort and reducing their operational costs. This is a powerful tool that will eventually lead to increased revenues. We are keen to offer investors and businesses new advantages in conducting global trade.”

Nine initiatives and 33 projects will be included in the strategy. This will be in collaboration with authorities that include Emirates airlines, Dubai Airports, Dubai South, Dubai Free Zones (DFZ) Council, Dubai Maritime City Authority, Dubai Roads and Transport Authority, DP World, Dubai Municipality and Jebel Ali Free Zone.

Virtual License

With the recently launched virtual scheme, residency in Dubai is no more mandatory for you to obtain a license. The first of its kind, virtual license is granted to individuals who don’t stay in Dubai, at a cost of Dh850 per year. For two-year visa one will have to pay Dh1,508, and Dh2,161 for three years.

Nationals of countries that have double taxation avoidance agreement with UAE can avail virtual license. According to the Dubai Virtual Commercial City, “Dubai Government authorities are working on a simplified visa process for the holders of virtual company licence. A virtual company licence doesn’t automatically guarantee a business bank account in the UAE and it will at the discretion of the commercial banks. However, we can facilitate access to account opening process.”

Virtual companies can conduct selected professional activities that include services related to printing and advertising; computer programming, consultancy and related activities; and design activities.

The UAE has the most diversified economy in the GCC. The country was reliant on oil and gas for centuries; but of late the government has started giving equal prominence to all the sectors. The move has helped the government in increasing its revenue and has led to an impressive development in sectors that include tourism, retail, manufacturing etc. Some of the leading industries in the UAE, that has been contributing immensely to the economy of the country include;

Retail

The retail industry has been witnessing a massive growth in the UAE, specifically Dubai. With numerous global retail players having established their base in the country, the industry is expected to thrive in the coming years.

According to reports, the value of retail sales in Dubai alone is expected to reach $43.8bn by the year 2020 and a growth of 5.6 percent is expected in the time period 2018-2021.

Dubai hosts some of the biggest shopping festivals in the world, that helps in boosting the local sales of retailers.

Hospitality

Hospitality is another fast-growing sector in the UAE, that has experienced envious growth over the past decade. Dubai attracts visitors from across the globe and is one of the most visited cities, with 15.93 million international overnight visitors in 2018.

The UAE hospitality market is expected to reach $7.6 billion within a span of 3 years at a five-year CAGR of 8.5 per cent. International tourist visits will increase to 25.5 million at a five-year CAGR of 4.3 percent.

Healthcare

UAE is home to a highly-developed healthcare system, that aims to become one among the best in the world by 2021. The UAE government’s various initiatives to promote the sector coupled with latest technologies that are being embraced, has helped the healthcare sector evolve rapidly.

A growth of 60 percent is expected in the healthcare industry between the time period 2016- 2021, that will be worth over AED 103 billion.

The highly specialised doctors along with events such as Arab Health Exhibition, that brings together healthcare companies, technology, and products, has helped the industry gain global recognition.

Manufacturing

Manufacturing is the second largest contributor to the economy of the country. It accounts for 80 percent of Dubai’s non-oil trade and 53 percent of the country’s total non-oil exports. Some of the primary sub-sectors of the industry are processed food and beverages, plastics and rubber, electrical machinery and equipment, chemicals and chemical products, minerals and mineral products, publishing and printing, pearls, precious stones and metals.

Organizations that plan to set up a manufacturing plant in Dubai are bestowed with a range of lucrative facilities.

Construction

Construction sector is an inevitable part of UAE economy, that has been flourishing leaps and bounds. The use of robots, unmanned aerial vehicles (UAV) and “intelligent” tools and equipment has helped in the automation of various tasks at construction sites and this has been a contributing factor to the thriving industry.

During the time period 2014-2018, residential construction accounted for the largest construction market in the UAE and it is expected to retain its position in the coming years. More than 15,000 projects worth $791 billion are at various stages across the UAE.

Media

Dubai, a hub for public relations companies, advertising firms, print, production and broadcast facilities, was recently named as the Capital of Arab Media for 2020 by the Arab Information Ministers Council.

According to His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, “Media outlets are not mere channels to cover events and disseminate information. Media is a partner in achieving development goals, setting their direction and driving their impact. It is a role that comes with great responsibility.”

The sector experienced an unprecedented rise in 2019, when compared to the previous year.

Setting up business in UAE for any of these sectors are relatively easy and all you must do is seek the help of a reputed business consultant.

The UAE Cabinet recently issued the Cabinet of Ministers Resolution No.31 of 2019, which requires all in-scope UAE entities to maintain an economic substance. This will be applicable to onshore and free zone companies that engage in certain “Relevant Activities”.

Ever since the introduction of economic substance regulations in UAE, people have been raising queries about numerous things related to it. Here we have listed below a set of questions and answers about economic substance regulations in UAE.

1. Why has the UAE introduced Economic Substance Regulations?

   The UAE was added to the European Union list of non-cooperative tax jurisdictions by the European Commission and this was the reason behind the issuance of the economic substance regulations. Economic Substance regulations are similar to the economic substance requirements that were recently implemented in jurisdictions that include the Cayman Islands and Jersey.The purpose of the Economic Substance Regulations is to ensure that UAE entities that undertake certain activities does not artificially attract profits.

2. What is the first reportable Financial Year?

   The Regulations apply to financial years starting on or after 1 January 2019. For a UAE entity with 1 January 2019 – 31 December 2019 financial year, the first assessable period would be the same time period and for an entity with 1 April 2019 – 31 March 2020 financial year, the first assessable period would be 1 April 2019 – 31 March 2020.

3. Our company is in the shipping business. Should we file ESR notification?

   Yes, UAE Economic substance regulation will be applicable to companies that engage in any of the below-mentioned “Relevant Activities”;

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

4. What are the requirements to meet economic substance test?

   A Licensee meets the Economic Substance Test in relation to a Relevant Activity in the following cases:

   1. If the Licensee conducts State Core Income-Generating Activity in the State.
   2. If the Licensee is directed and managed in the State in relation to that activity, provided the Licensee’s board of directors meets in the State at an adequate frequency having regard to the amount of decision-making required at that level.
   3. Having regard to the level of Relevant Activity, if there is an adequate number of qualified full-time employees in relation to that activity who are physically present in the State (whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third-party service providers, whose activities, employees, expenditure, and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
   4. If there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third-party service providers whose activities, employees, expenditures and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
   5. If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third-party service providers in the State, for the activities of the Licensee;
   6. In the case of State Core, Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.

5. Do the Regulations only apply to UAE entities that are part of a foreign multinational group, or that are owned by a foreign shareholder?

   No, Economic substance requirements will be applicable to all entities that engage in relevant activities irrespective of the fact whether they belong to a foreign multinational group or not. In the case of a UAE-based Distribution Business, Service Centre Business, Headquarter Business or High-Risk IP Business, the regulations will be imposed if the organization transacts with foreign group entities.

6. Mine is an offshore company. Should I file ESR notification?

   Yes, offshore companies that undertake relevant activities are subject to economic substance regulations.

7. Who is exempt from the Regulations?

   Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE Government body or authority need not comply with the economic substance regulations.

8. Our company hasn’t undertaken any relevant activity during the financial period. Do we still need to file ESR notifications?

   Licensees that do not involve in a relevant activity during a financial period do not have to meet the economic substance test and will be exempted from the process of notifying the regulatory authority and submitting an economic substance return.

9. Our company hasn’t generated any income from the relevant activity. Should we file ESR notification?

   In cases like these, the licensee need not file an economic substance return for the relevant financial period but will have to submit a notification with the regulatory authority.

10. If all income from the Relevant Activity is earned from outside the UAE, is the Licensee exempt from the Economic Substance Regulations?

    No, the Licensee is not exempt from the Economic Substance Regulations.

11. Will economic substance be assessed on a Licensee by Licensee basis, or can Licensees that are part of the same group elect to be assessed on a ‘consolidated’ basis?

    No, each Licensee must comply with the Economic Substance Regulations and demonstrate economic substance individually.

12. What are the deadlines for filing Economic substance regulation notification for UAE free zones?

    Free Zone Authority	Deadline
    Abu Dhabi Media Zone Authority	30th June
    ADGM	30th June
    Ajman FZ	30th June
    DAFZA	15th June
    DIFC	30th June
    DMCC	30th June
    Dubai Aviation City Corporation	7th June
    Dubai Development Authority	25th June
    Dubai Healthcare City	7th June
    Dubai World Trade Centre	30th June
    Fujairah Free Zone	15th June
    Hamriyah Free Zone Authority	30th June
    International Free Zone Authorities	30th June
    KIZAD	20th June
    Ministry of Economy	30th June
    RAK EZ	30th June
    RAK ICC	30th June
    SAIF	30th June
    Umm Al Quwain Free Trade Zone	30th June

13. When is the last date to file ESR notification for mainland companies?

    30th June

14. What if I don’t file the ESR notification before the deadline?

    Failure to comply with the ESR (including providing inaccurate or incomplete information) may result in a fine of between AED 10,000 and AED 50,000 in any fiscal year. The fines increase to between AED 50,000 and AED 300,000 for the subsequent fiscal year.

15. My company is going into liquidation. Should we file ESR notification?

    All licensees in liquidation should file a notification.DIFC has confirmed that organizations operating in the free zone that has been dissolved, struck off or liquidated before the deadline for submission of the Notification need not file ESR notification.

Jay Krishnan
Partner
jk@hlbhamt.com

Sumesh Krishna
Partner
sumesh@hlbhamt.com