BACKGROUND OF ESR
Why has the UAE introduced Economic Substance Regulations (ESR)?
UAE introduced Economic Substance Regulations (‘ESR’) under its commitment as a member of the Organization of Economic Cooperation and Development (‘OECD’)’s Framework on Base Erosion and Profit Shifting (‘BEPS’). To this effect, the Cabinet Decision 31 of 2019 was introduced with the UAE Govt formally issuing Regulations and guidelines as well.
The move was introduced in effect to ensure that those UAE entities who undertake certain activities do not artificially attract profits that are not commensurate with economic activities conducted in the UAE. Relevant companies are required to maintain an adequate “economic presence” in the UAE relative to the activities they undertake.
What is the first reportable Financial Year?
The Regulations apply to financial years starting on or after 1 January 2019. So, in effect for a UAE company with its Financial year covering 1 January 2019-31st December 2019, the first assessable period would be 1 January 2019-31st December 2019.
Similarly, for a UAE company with 1 May 2019 – 30 April 2020 as the financial year, the first assessable period would be 1 April 2019 – 30 April 2020. In effect, it’s the 12 month period that needs to be covered.
UAE was enlisted in the EU blacklist in March 2019 because it failed to comply with Economic Substance Regulations. To counter this, the UAE introduced the ESR, which is directly in line with other Tax Jurisdictions globally.
The issuance of the Economic Substance Regulations on 30 April 2019 (the Regulations), and the subsequent release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019.
SCOPE OF ESR
Licensee (definition)
Natural Person licensed by the competent licensing authority/ authorities in the State to carry out a Relevant Activity in the State Juridical person authorized by the competent licensing authority/ authorities in the State to carry out a Relevant Activity in the State Except Commercial company held at least 51% by -Federal Govt -Emirates Govt -Govt Authority, or -Any Body of them
1. Who do the Regulations apply to?
The Regulations apply to all UAE onshore and free zone companies, branches, partnerships, and other UAE business forms (referred to as Licencees).
2. Who is exempt from the provisions of the Regulations?
Licensees in which the UAE federal government, the government of any emirate, or any UAE national or emirate-level governmental authority or body holds at least 51% direct or indirect equity ownership are not subject to ESR Regulations.
It is to be noted that if a licensee does not conduct a Relevant Activity or conducts one but does not generate any income, then the Licensee will be considered exempt. The Licensee, however, will still need to make a notification filing.
3. What are the Relevant Activities?
The following are considered Relevant Activities for filing purposes:
(a) Banking Businesses;
(b) Insurance Businesses;
(c) Investment fund management Businesses;
(d) Finance leasing Businesses;
(e) Headquarter operations;
(f) Shipping;
(g) Holding company operations;
(h) Intellectual property operations; and
(i) Distribution and service centers.
It is of utmost importance to regard the actual activities that are undertaken by the Licensee. Hence, it does not matter whether or not the activities listed above appear on a Licensee’s Trade License. A substance over form approach will be taken to determine if a Licensee is subject to the Regulations.
Further information on each of the Relevant Activities can be found in the Guidance:
https://www.mof.gov.ae/en/lawsAndPolitics/CabinetResolutions/Pages/ministerial-decision-215-year-2019-.aspx
4. What is the purpose of the Notification?
The purpose of this Notification is to provide the Regulatory Authority with certain initial information on the Licensee and its activities in the UAE and is a prerequisite to filing an Economic Substance return for the Reportable Period (where required).
5. Can a single Notification be filed for multiple Licensees?
No, each Licensee must file an Economic Substance Notification as a single entity, irrespective of it’s standing as part of a consolidated group for accounting purposes.
6. How should the Notification be filed?
Economic Substance Notification can be submitted through the CRM Portal. The flow is as shown below:
Login in CRM portal -> Services -> Licensing Services -> Economic Substance Regulation Form (ESR Notification Form).
7. What happens if a licensee does not submit a Notification, although it is required to do so?
Failure to comply with the obligation to file an ESR before the deadline may subject the Licensee to penalties ranging from AED 10,000 to AED 50,000.
Who should you contact if there are further questions?
Further information can be obtained from the Ministry of Finance website (https://www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx)
