There have been certain changes to the rules and regulations pertaining to economic substance regulations in the UAE. The UAE Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020 that includes a set of amended regulations and all licensees in the UAE are required to re-assess their current ESR classifications and align them according to the latest regulations.
All licensees who engage in a relevant activity must re-file notifications that were filed for FY 19 via the MoF’s dedicated portal. The uploading of ESR reports will have to be done using the same portal within 12 months, following the end of the licensee’s financial year-end.
We have listed below a summary of the major amendments to ESR regulations in UAE;
Definition of Licensee
A natural or judicial person licensed to carry out a relevant activity.
The definition of a “licensee” has been amended to mean juridical persons and unincorporated partnerships registered in the state, including a free zone and financial free zone that carry out a relevant activity. On the other hand, natural persons, sole proprietors, trusts and foundations are not in scope of the ESR anymore.
Only entities with at least 51 percent direct or indirect government ownership.
Earlier only entities with 51% or more direct/indirect government ownership were exempted from ESR. But now, along with them, the following categories of licensees will be exempted from ESR;
UAE branches of foreign companies;
Licensees that are tax resident outside UAE;
UAE resident-owned businesses; and
Any licensee the Minister of Finance decides to give exemption to
Even though these licenses are exempted from ESR, it is mandatory to file ESR notification along with sufficient evidence claiming the exemption.
Definition of “Connected person” and “group”
Connected person: –
A natural or juridical person who is related to one or more juridical person(s) through direct or indirect ownership or control, or common control
An entity that is part of the same group as the licensee or exempted licensee
Group: – Not defined
Two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable.
“Distribution Business” definition
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.
A center that involves in any of the following businesses;
Purchasing from a foreign connected person component parts or materials for goods; or goods ready for sale; and reselling such component parts, materials or goods or;
Providing services to foreign connected persons
“Holding company business” definition
A Holding Company in accordance with the law applicable to the Licensee carrying out such activity in the State.
has as its primary function the acquisition and holding of shares or equitable interests in other companies.
does not carry on any other commercial activity.
It is a business that;
has its sole function the acquisition and holding of shares or equitable interests in other companies; and
Only earns dividends and capital gains from its equitable interests.
Service Centre business definition
Providing services to foreign connected persons in connection with a business outside the State
Providing services to foreign connected persons
High-Risk IP Business definition
A High-Risk IP Licensee is defined under Article 1 of the Economic Substance Regulations as a Licensee which carries on an Intellectual Property Business, and under condition (a) of the definition meets all of the following three requirements:
The Licensee did not create the Intellectual Property Asset which it holds for the purpose of its business, and
The Licensee acquired the IP Asset from either;
A group company, or
In consideration of funding research and development by another person situated in foreign jurisdiction, and
The Licensee licenses or has sold the IP Asset to one or more group companies or otherwise earns separately identifiable gross income (e.g. royalties, license fees) from a foreign group company in respect of the use or exploitation of the IP asset.
the Licensee does not carry out research and development, or branding, marketing and distribution as part of its State Core Income-Generating Activity.
Is a licensee which carries on an intellectual property business and the licensee
Did not create the intellectual property in an intellectual property/ asset which it holds for the purpose of its business;
Acquired the intellectual property asset either from-
A connected person; or
In consideration for funding research and development by another person situated in a country other than the state; And
licenses or has sold the intellectual property asset to one or more connected persons, or otherwise earns separately identifiable income from a foreign connected person in respect of the use or exploitation of the intellectual property asset.
All gross income from a relevant activity that is recorded in the books and records of the licensee or the exempted licensee under the accounting standards applicable thereto.
AED 10,000 to 50,000 if the licensee fails to meet the requirements of the tests in the first year and AED 50,000 to 300,000 if it happens in the second year also.
AED 10,000 to 50,000 if the information given to RA or FTA is not correct/ accurate.
AED 10,000 to 50,000 if notification is not submitted.
License annulment for persisted non-compliance.
AED 50,000 if the licensee fails to submit report or doesn’t meet the requirements of the tests in the first year and AED 400,000 if it happens in the second year also.
AED 50,000 if the information given to RA or FTA is not correct/ accurate.
AED 20,000 if notification is not submitted.
License annulment for persisted non-compliance.
Clarification on branches
UAE branch of a UAE company
Single notification/ report to be filed
Foreign branch of a UAE company
Not relevant to ESR for relevant activities undertaken by foreign branches, if income of such foreign branches are taxed abroad.
UAE branch of a foreign company
Not subject to ESR if income of the UAE branch is subject to tax in the foreign parent jurisdiction (reported in the tax return of the foreign parent regardless of exemption)
Compliance during liquidation
Licensees carrying out relevant activities must fulfill ESR compliance requirements even if they are undergoing liquidation.
Amendments in the contents of the ESR notification/ report
Licensees who engage in a relevant activity must give details regarding the jurisdiction in which the Parent Company, Ultimate Parent Company, and Ultimate Beneficial Owner claim to be tax residents, in their notifications/ reports. They are also required to submit a copy of the financial statements along with the economic substance reports.
One will have to file notification within six (6) months after the financial year-end, via the MoF’s portal.
HLB HAMT has been assisting clients to comply with ESR regulations and we will be happy to guide them on the new amendments and steps to proceed further.
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