ESR Notification UAE : On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”), requiring all in-scope UAE entities (“Relevant Entities”) that carry on certain activities (“Relevant Activities”) to have demonstrable economic substance in the UAE from 30 April 2019. The Regulations apply to all UAE onshore and free zone companies that carry on a “Relevant Activity”.
Irrespective of whether your trade license activities relate to ‘Relevant Activity” as per the Regulatory Authority you have to submit the Economic Substance Notification on or before the date prescribed by the Relevant Authority in the prescribed format and mode.
Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on August 2020 (the Regulations), and updated Guidance was issued on 10 August 2020 (Ministerial Decision No. (100) of 2020.
The Regulations are effective from 1 January 2019, and apply to financial years starting on or after 1 January 2019.
The Regulatory Authorities are responsible for monitoring compliance with the Notification and reporting obligations under Regulations, identifying possible Licensees, validating information submitted, determining whether a relevant entity meets the requirements to be treated as exempt and sharing information with the UAE Federal Tax Authority and the UAE Ministry of Finance.
A Licensee is a juridical person or an unincorporated partnership that is registered in the UAE and that undertakes a Relevant Activity.
By way of example, a Licensee can be:
- A limited liability company
- A private shareholding company
- A public shareholding company
- A joint venture company
- A partnership (e.g. a limited liability partnership, a limited partnership, a general partnership, etc.)
The following persons are not considered “Licensees” under ESR Notification UAE
- A natural person
- A sole proprietorship
- A Trust
- A Foundation
The assessment and determination on whether a Licensee has economic substance in the UAE is made by the Federal Tax Authority, in its capacity as the “National Assessing Authority” under the Regulations.
- Based on the previous regulations, almost each Regulatory Authority had issued its own format and time to submit notification which expired on June 30, 2020. In the context of certain amendments in the regulations and definition of Licensee, we expect to have a new uniform format be issued by the Ministry of Finance to submit the notification.
- Hence Businesses are required to wait for the revised format and resubmit the notification based on the revised criteria.
Relevant Activities under ESR Notification UAE
The Regulations apply to Licensees that carry out any of the following Relevant Activities.
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquarter Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property Businesses
- Distribution and Service center Businesses.
Licensees that undertake a Relevant Activity are required to file an annual Notification. In addition, Licensees that earn income from their Relevant Activity (ies) are also required to file an Economic Substance Report within 12 months from the end of the relevant financial period. Demonstrating substance for each financial period in which a Licensee earns income from a Relevant Activity, it will need to meet an Economic Substance Test in relation to that activity.
While the commercial license may indeed state the Relevant Activity, a ‘substance over form’ approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the Regulations. This means looking beyond what is stated on the commercial licence to the activities actually undertaken by the Licensee during a financial period.
This assessment needs to be done for each financial period starting on or after 1 January 2019, and should take into account the activities undertaken by the Licensee at any time throughout the relevant financial period.
Only Licensees that earn income from a Relevant Activity during the relevant financial period and that are not exempt from the Regulations are required to demonstrate economic substance in the UAE and file an Economic Substance Report. Economic Substance Reports must be filed within 12 months from the end of the relevant financial period.
ESR Notification UAE : Exempted Licensees
The following Exempted Licensees are exempt from filing an Economic Substance Report and the requirement to demonstrate substance in the UAE:
- A Licensee that is tax resident outside the UAE;
- An Investment fund and its underlying SPVs / investment holding entities;
- A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE
- A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction Sufficient evidence must be submitted along with the Notification form to claim any of the above exemptions
Penalties for Failure to submit a Notification: AED 20k
Penalties for Failure to submit an Economic Substance Report and fails to satisfy ES test: AED 50k (1st year), AED 400,000 (subsequent year) and there are chances of suspension, revocation or non-renewal of License.
Penalties for providing inaccurate information: AED 50,000
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