ESR Notification and Reporting in UAE
The UAE acknowledges that businesses vary in size and nature, and what is adequate and appropriate will depend on the nature and level of activities carried out, and the level of income earned by the Licensee. The Regulations therefore, do not provide a “minimum” standard for what is considered “adequate” or “appropriate”.
The Federal Tax Authority is expected to take a pragmatic approach when assessing whether a Licensee has met the Economic Substance Test, recognizing that the type and level of activity of a Licensee may fluctuate during a financial period and from year to year.
Any Licensee that (i) carries out a Relevant Activity and (ii) derives Relevant Income (means 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) from a Relevant Activity during a Financial Year is required to demonstrate sufficient economic substance in the UAE proportionate to the nature of the Relevant Activity and the amount of Relevant Income derived by it.
The Economic Substance Test requires a Licensee to demonstrating that:
- The Licensee and Relevant Activity are being directed and managed in the UAE.
- The relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE; and
- The Licensee has adequate people, premises, and expenditure in the UAE.
For the avoidance of doubt, a Licensee is not required to meet the Economic Substance Test (and file an Economic Substance Report) in a Financial Year in which it has no Relevant Income. However, the Licensee remains subject to the Notification requirement.
The assessment for ESR commences with the analysis of whether the entity meets the definition of a Licensee.
Who is a Licensee?
- A limited liability companies
- A private shareholding companies
- A public shareholding companies
- A joint venture companies
- A partnership (e.g., a limited liability partnership, a limited partnership, a general partnership, etc.)
The following persons are not considered “Licensees” under the Regulations:
- A natural person
- A sole proprietorship
- A Trust
- A Foundation.
Branches registered in the UAE are regarded to be an extension of their “parent” or “head office” and therefore are not considered to have separate legal personality.
Similarly, a branch of a foreign entity registered in the UAE that carries out a Relevant Activity is required to comply with the ESR Regulations, unless the Relevant Income of such branch is subject to tax in a jurisdiction outside the UAE.
Where a UAE entity carries on a Relevant Activity through a branch registered outside the UAE, the UAE entity is not required to consolidate the activities and income of the branch for purposes of the ESR Regulations, provided that the Relevant Income of the branch is subject to tax in the foreign jurisdiction where the branch is located.
Certain category of Licensees is exempt from filing an Economic Substance Report and the requirement to demonstrate substance in the UAE:
(a) An Investment Fund
The ESR Regulations define an Investment Fund as “an entity whose principal business is the issuing of investment interests to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests (but does not include an entity or entities in which the fund invests).”
The above definition would include the Investment Fund itself and any entity through which the fund directly and indirectly invests, but not the entity or entities in which the fund ultimately invests.
For the avoidance of doubt, the words “through which an investment fund directly or indirectly invests” refers to any UAE entity whose sole function is to facilitate the investment made by the Investment Fund.
(b) An entity that is tax resident in a jurisdiction other than the UAE
An entity is not required to meet the Economic Substance Test if such entity is tax resident in a jurisdiction outside the UAE. In order for such entity to avail this exemption, the entity must be subject to corporate tax on all of its income from a Relevant Activity by virtue of being a tax resident in a jurisdiction other than the UAE.
It should be noted that an entity that pays withholding tax in a foreign jurisdiction will not be considered as tax resident in a foreign jurisdiction other than the UAE solely on that basis.
(c) An entity wholly owned by UAE residents and meets the following conditions
- The entity is not part of a MNE Group;
- All of the entity’s activities are only carried out in the UAE;
An entity that is ultimately wholly and beneficially owned (directly or indirectly) by UAE residents is exempt from the Economic Substance Test only where such entity is: (i) not part of a MNE Group; (ii) all of its activities are exclusively carried out in the UAE and (iii) the UAE resident owners of the entity reside in the UAE. The entity must therefore not be engaged in any form of business outside the UAE.
In this context, “UAE residents” means UAE citizens and individuals holding a valid UAE residency permit, who reside in the UAE.
(d) A Licensee that is a branch of a foreign entity the Relevant Income of which is subject to tax in a jurisdiction other than the State
An entity is not required to meet the Economic Substance Test if such entity is a branch of a foreign entity and its Relevant Income is subject to corporate tax in the jurisdiction where such foreign entity is tax resident.
Evidencing status as an Exempted Licensee
Any entity which claims to be an Exempted Licensee must submit to the relevant Regulatory Authority, along with a Notification, sufficient evidence substantiating its status as an Exempted Licensee for each Financial Year in which it claims to be an Exempted Licensee.
A Licensee that claims to be exempt on the basis of being a tax resident in a foreign jurisdiction is required to submit one of the following documents along with its Notification in respect of each relevant Financial Year:
- Letter or certificate issued by the competent authority of the foreign jurisdiction in which the entity claims to be a tax resident stating that the entity is considered to be resident for corporate income tax purposes in that jurisdiction; or
- An assessment to corporate income tax on the entity, a corporate income tax demand, evidence of payment of corporate income tax, or any other document, issued by the competent authority of the foreign jurisdiction in which the entity claims to be a tax resident.
Where an entity fails to provide sufficient evidence to substantiate its status as an Exempted Licensee, the entity will be regarded as a Licensee for the purposes of the ESR Regulations and shall be subject to the requirements of the ESR Regulations as applicable to a Licensee, including the requirement to meet the Economic Substance Test.
ESR Notification in UAE
Each Licensee and Exempted Licensee shall notify the Regulatory Authority annually of the following –
- The Relevant Activity being carried out by such Licensee or Exempted Licensee during the Relevant Financial Year;
- Whether it has generated Relevant Income during the Relevant Financial Year ;
- The date of commencement and end of its Financial Year;
- Any other information or documents as may be requested by the Regulatory Authority.
ESR Reporting in UAE
The Economic Substance Report shall be in the form and manner approved by the National Assessing Authority in coordination with the Competent Authority and shall include the following information and documents with respect to the Licensee for the relevant Financial Year:
- The type of Relevant Activity conducted by it;
- The amount and type of the Relevant Income earned by it;
- The amount and type of operating expenses and assets in respect of the Relevant Activity carried out by it;
- The location of the place of its business and, if applicable, plant, property or equipment used for the Relevant Activity by it in the State;
- The number of full-time employees with qualifications and the number of personnel who are responsible for carrying on its Relevant Activity;
- The Core Income-Generating Activity in respect of the Relevant Activity being carried out by it;
- Its financial statements;
- A declaration as to whether or not it satisfies the Economic Substance Test;
- In the case of a Relevant Activity being an Intellectual Property Business, a declaration as to whether or not it is a High-Risk IP Licensee.
What should a Licensee consider before the end of a financial period?
The following is meant as a non-exhaustive list of matters a Licensee should consider (and action, where relevant) before the end of a financial period:
- Assess what (if any) Relevant Activities it has performed during the financial period (applying a “substance over form” approach);
- Assess the amount and type of income earned (if any) from the Relevant Activity during the financial period.
- Hold board meetings with a quorum of directors physically present in the UAE.
- Ensure board meeting minutes are signed and maintained in the UAE.
- Identify the amount and type of expenses and UAE-based assets (incl. premises) in respect of the Relevant Activity, and ensure access to assets (incl. premises) can be demonstrated (through agreements and financial records)
- Identify the number of UAE-based full-time employees or other personnel (and their qualifications) responsible for carrying on the Licensee’s Relevant Activity; and
- Ensure control and supervision over any outsourcing arrangements can be demonstrated, e.g., through contractual agreements.
Additional actions may be required to ensure a Licensee can demonstrate sufficient economic substance in the UAE for a relevant financial period, and the considerations above.
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