The economic substance requirements (“ESR”) were introduced by the United Arab Emirates (“UAE”) in April 2019. On the 10th August 2020, the UAE introduced significant changes to the ESR regulations under the Cabinet of Ministers Resolution No.57 of 2020 which amends and repeals the previous resolutions. New guidelines have been issued by the Ministry of Finance by way of Ministerial Decision No. 100 of 2020, providing a new legal framework for the ESR in the UAE.
The key changes introduced by these new ESR regulations can be summarized as follows:
- Definition of a “Licensee”: The definition has been amended to be limited to juristic persons and unincorporated partnerships that are registered in the UAE, whether by way of commercial/trade license or other form of permit, that carry out a relevant activity in the UAE. This includes offshore companies incorporated in Ras Al-Khaimah International Corporate Center (“RAKICC”). On another note, natural persons, sole proprietorships and other business forms that are not juridical entities are no longer within the scope of the ESR regulations.
- Exempted entities: UAE companies that are majority (51% or more) owned by the UAE government are no longer exempt from the ESR. In addition, an updated list of exemptions has been issued that includes the following categories:
- 1. UAE companies that are tax resident outside of the UAE;
- 2. Investment Funds
- 3. UAE entities wholly owned by a UAE resident that are not part of a multinational group, and that only carry out business activities in the UAE;
- 4. UAE branches of a foreign company if the relevant income of the branch is subject to tax in the foreign jurisdiction.
To claim an exemption under any of the aforementioned grounds, the licensee must file a notification and provide sufficient documentary evidence to show that it meets the requirements of the relevant exemption category for each financial year in which it claims to be exempt.
- Relevant activities: Updates and clarifications were made in relation with the definitions of several relevant activities, including high-risk intellectual property (IP) businesses, and distribution and service center businesses.
- National Assessing Authority: The UAE Federal Tax Authority (“FTA”) has been appointed as the National Assessing Authority for the purposes of the ESR regulations. In this capacity, the FTA will be primarily responsible for assessing whether a Licensee has met the requirements of the economic substance test during the relevant period and levying penalties in cases of non-compliance. The regulatory authorities such as RAKICC will continue to be responsible for the collection and verification of information regarding their Licensees and shall assist the FTA in carrying out its role as the National Assessing Authority.
- Notification and ESR Reports: Moving forward, notifications and ESR reports shall be filed via the Ministry of Finance Portal, once available. Notifications must be filed within six months from the Licensees and/or exempted Licensee’s financial year end. The deadline for ESR reports for the financial year 2019 remains set on the 31st December 2020.
- Penalties: A new regime of penalties have been introduced with fines up to AED 400,000, including suspensions and nonrenewal of trade licenses.
Following the introduction of these new ESR regulations, any UAE business falling within the definition of Licensee should re-assess its position to determine whether these changes might have an impact on their ESR approach, and ultimately undertake the necessary steps to comply with the ESR in the UAE, including filing a new notification and ESR report with the authorities when the assessment for financial year 2019 has changed under the new ESR regulations.
For further information about the updated ESR in the UAE, please visit https://www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx