Economic Substance Regulations (ESR) In The UAE
All You Need To Know
Recently, the UAE Cabinet of Ministers revoked the first resolution from 2019 and issued a revised regulation through Cabinet Resolution No. 57 of 2020, which we'll ask here because the New ESR. Supplementary guidance for the New ESR was punlished through Ministerial Decision No.100 of 2020 from the UAE Ministry of Finance (MOF), which replaces the previous Decision No. 215 of 2019, and includes an updated Relevant Activities Guide.
In this article, we'll explore the key amendments under the New ESR you would need to know about , outline what you'll expect next, and share to ensure you're prepared.
The New ESR amendments Explained
The definition of Licensees has changed
The definition of "Licensees" which are required to suits the New ESR now only applies to a company person (incorporated inside or outside of the UAE), or an unincorporated partnership – each having a presence within the UAE and conducting a Relevant Activity.
If you're a natural person, trust, sole proprietor, or foundation, you not fall within the scope of the definition.
These new exemption categories now include:
• investment funds
• entities which are owned (100%) by UAE residents and which are not part of a multinational enterprise group and which only carry out their activities in the UAE
• entities which are a tax resident not in the UAE, and
• branches of foreign parent companies where the relevant income is subject to tax not in the UAE.
Majority government-owned entities are no longer exempt, unless they fall within one of the updated exemptions of the New ESR.
If you're a Licensee and need to profit from the exemption you'll got to provide evidence that your entity qualifies for an exemption.
UAE company branches don't got to file separate notifications anymore
The New ESR recognises that UAE branches of a UAE company do not have separate legal personalities from their parent or head office. Therefore, if you're a branch of a UAE parent entity and are registered within the UAE, you not got to file separate notifications. All that's needed may be a single notification concerning the Relevant Activities of your UAE parent company alongside all of your UAE branches.
Reporting requirements for UAE companies with non-UAE branches have been tweeked
If you're a UAE company that conducts a Relevant Activity only through a branch registered outside the UAE, your UAE company doesn't got to report and demonstrate economic substance in situations where the income earned through the branch is taxed within the oversees jurisdiction where the branch is registered.
Foreign companies with UAE branches even have relaxed reporting requirements
If you're a far off company with a branch office registered within the UAE, then you do not got to demonstrate economic substance under the New ESR, as long as the income earned by your branch’s activities, that might conceptually fall under a Relevant Activity category, is subject to tax in your overseas jurisdiction.
UAE company branches don't got to file separate notifications anymore
The definitions for connected person and group have changed
New definitions for "connected person" and “group” are introduced. These will impact the assessment regarding whether you're conducting the headquarters business, distributions and repair centre business, also as high risk IP Business Relevant Activities.
The requirement to import and store goods inside the UAE may be a thing of the past
The requirement to import and store goods inside the UAE – which was previously required for the "distribution" a part of the Distribution and repair Centre Business Relevant Activity – is not any longer applicable.
Furthermore, for the "service centre" element of this Relevant Activity, the services provided
by Licensees not got to be provided "in reference to a business outside of the UAE", but rather any services provided to a far-off related party would seem to end in your business as a Licensee possibly falling into this category.
The FTA is now responsible of compliance and control
The UAE FTA has been appointed because the National Assessing Authority to oversee compliance and control of the New ESR.
If you are a Licensee, you will have to file a notification with the MOF
The New ESR still includes several regulatory authorities’ responsibilities for receiving economic substance notifications, economic substance reports, and everyone supporting documents.
However, the new guidance suggests that if your business qualifies as a Licensee, you'll need to file notifications with the UAE Ministry of Finance, via a web portal – which, as of this update, remains to be launched – within six months from the top of your fiscal year.
Penalties
The penalties under the New ESR are increased, including the chief penalties for non-compliance, which are now between AED 20,000 and AED 50,000. If you fail to satisfy the economic substance test your business could incur a penalty of AED 50,000; you would possibly also face the suspension or non-renewal of your license as additional penalties.
Deadlines
In the absence of updated filing deadlines, it appears that the deadline for economic substance reports for the 2019 fiscal year will remain 12 months after the top of the relevant fiscal year. If you are a Licensee, this could be as early as 31 December 2020.
It's important to notice that each one Licensees (including exempted Licensees) are required to file notifications on the new online portal once it's available, no matter whether or not they have already submitted notifications for the 2019 fiscal year under the old legislation.
What happens next?
If you've got a UAE business – including entities registered in free zones and offshore entities – we recommend you re-assess whether you qualify as a Licensee or an exempted Licensee as soon as possible. Alongside this, we encourage you to urgently reconsider whether you're conducting a Relevant Activity under the New ESR and new guidance. Doing so will enable you to form the acceptable compliance filings when the new filing portal becomes available.
Given that the top of the 12-month period following a Licensee’s 2019 fiscal year is approaching for several entities, we also recommend that you simply look beyond the primary stage notification filing. If your UAE entity qualifies as a Licensee, has conducted a Relevant Activity, and derived income from an equivalent within the reporting period, it might be prudent to start out preparation of the documents and knowledge required to point out how the economic substance test is met.
If any gaps are identified, it's crucial for you to plan and implement a mitigation strategy to make sure compliance and avoid severe consequences within the future.
GulfCFO Services is here to assist you
For further information or for assistance with your evaluations or filings, please contact us at hi@gulfcfo.com or visit our website http://gulfcfo.com
