Amendments to the Economic Substance Regulations in UAE

Jay Krishnan, Partner

21 September, 2020

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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.

Amendments to economic substance regulations uae

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.

Amendments to economic substance regulations uae

We have listed below a summary of the major amendments to ESR regulations in UAE;

#ParticularsOld ESRNew ESR
1Definition of LicenseeA 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.
2Exempted licenseesOnly 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;

  • Investment funds;
  • 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.
3Definition 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.
4“Distribution Business” definitionPurchasing 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
5“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.
6Service Centre business definitionProviding services to foreign connected persons in connection with a business outside the StateProviding services to foreign connected persons
7High-Risk IP Business definitionA 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.
8 
Relevant income
Not definedAll 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.
9Penalties 

  • 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.

Amendments to economic substance regulations uae

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.

Notification timeline

One will have to file notification within six (6) months after the financial year-end, via the MoF’s portal.

Amendments to economic substance regulations uae

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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