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Economic Substance Regulations

What is Economic Substance Regulation and the purpose for enacting them?

The UAE introduced Economic Substance Regulation (ESR) on 30 April 2019 through a Cabinet of Ministers Resolution No. 31 of 2019.
This was done as a part of UAE’s commitment as a member of the OECD Inclusive Framework to implement the action points of OECD base erosion and profit shifting framework for countries across the globe with low or no corporate taxes where harmful tax practices such as tax avoidance and evasion are prevalent. UAE’s move to implement ESR also came in response to an assessment of the UAE’s tax framework by the European Union (“EU”) Code of Conduct Group on Business Taxation
The objective of this new regulation is to ensure that all legal entities in UAE have genuine substance in the region and are reporting actual profits generated from activities conducted in the region.

 

Who does the Economic Substance Regulations apply to?

ESR applies to all legal forms of business licensed with SAIF Zone carrying on one or more “Relevant Activities” in UAE.

Who is exempt from ESR?

Licensees having at least 51% direct or indirect ownership of the Federal or an Emirate Government, or a UAE Government body or authority, are exempt under ESR.


Where can I find the ESR legislation and guidance?

The ESR legislation and guidance are as follows:

Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations, as amended by Cabinet Resolution No. 7 of 2020 (Regulations)

Ministerial Decision No. 215 of 2019 (Guidance)

Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies to identify the relevant regulatory authority to implementing ESR

The FAQs are also published by the Ministry of Finance on their website along with the flowchart.

 

What are Relevant Activities under ESR?

The Relevant Activities under the Economic Substance Regulations are:
Banking Businesses
Insurance Businesses
Investment Fund Management Businesses
Lease-Finance Businesses
Headquarters Businesses
Shipping Businesses
Holding Company Businesses
Intellectual Property Businesses
Distribution and Service Centre Businesses

The MoF has released guide for relevant activities. Please refer to the guide here.


Are the Relevant Activities same as the activities mentioned on Commercial licenses?

No, substance over form approach should be adopted. The licensee is required to look beyond what is stated on the commercial license for the activities actually undertaken during the financial period.


What if a Licensee does not earn any income from the Relevant activity performed?

The licensee is not required to comply with the ESR tests. However, the licensee is required to submit the notification for ESR.

 

What are the tests under ESR?

There are three tests for ESR:
The relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE;
The Relevant Activity is being directed and managed in the UAE;
The entity should have adequate employees, premises and expenditure in the UAE.

 

What is the first reportable period under ESR?

The Reportable Period is the financial period commencing from 01 January 2019.
For example- An entity having financial year starting 1 January 2019 to 31 December 2019, the reportable financial year under ESR will be 1 January 2019 to 31 December 2019.


Are entities in the liquidation process required to file ESR notification?

The licensees that are in the process of liquidation are required to comply with the Economic Substance Notification requirement in respect of financial years ending on or before the completion of the liquidation process.


What are the reporting requirements for licensees under ESR?

All the licensees in SAIF Zone are required to submit an annual notification under ESR including companies exempt from ESR (explained above).
The licensees who earn income from Relevant Activities during a particular financial year will also be required to file an annual report under ESR.

What details to be submitted under ESR notification?

The following details are required to be submitted in the ESR notification:
General details around Trade license number, authorized signatory, and the financial year
Whether the licensee is carrying on a Relevant Activity;
If yes; whether all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax is any other jurisdiction
If the licensee directly/ indirectly owned by Federal or Emirate level government.

 

What is the deadline for ESR notification?

The deadline for first financial year commencing January 2019 is 30 June 2020.
Is a separate notification required for each licensee in SAIF Zone?

Each licensee is required to file a stand-alone notification. A single notification cannot be filed for multiple licenses of the same entity or group.

What is the deadline for ESR report?

The annual ESR report is to be filed within 12 months from the end of the financial year.
For example- If the financial year for a licensee ends on 31 December 2019, the ESR report is to be filed by 31 December 2020.


What happens if a licensee does not submit the notification/report?

Non-compliance with the obligation to file an ESR notification/ report within the deadline may be subject to a penalty under the UAE ESR laws spanning from AED 10,000 to AED 50,000.


What happens if incorrect or false information is recorded in the ESR notification/ report?

Providing incorrect or false or misleading information in the ESR notification/ report form may attract penalties spanning from AED 10,000 to AED 50,000 under the UAE ESR laws. This can further result in the licensee being treated as having failed the ESR test for the relevant financial year.


What are the consequences of failure to meet ESR test?

  • First year of failure
    Penalty of AED 10,000 to AED 50,000; and
    Information exchange with foreign competent authority of:
    parent company;
    ultimate parent company; and
    ultimate beneficial owner

  • Second consecutive year of failure
    Information exchange with foreign competent authorities as above;
    Penalty of AED 50,000 to AED 300,000; and
    Suspension, revocation or non-renewal of the Commercial license.

Can SAIF Zone advise whether my Company is within the scope of ESR and whether I meet the tests?

ESR is a self-assessing requirement. SAIF Zone is unable to make decisions on behalf of the licensees as SAIF Zone is the authority which will audit the notification and reports submitted by the licensees.
If you require further information or advise, please refer to the MoF website or contact professional advisors.

 

ESR Notification Filing and User Manual

Click to go through the steps to submit the Economic Substance Requirement Notification online through SAIF Zone website.

For any further queries regarding ESR, feel free to get in touch with us at [email protected]

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