UAE Economic Substance regulations (ESR), were originally issued in April 2019 through a Cabinet of Ministers resolution No. 31 of 2019 along with the Ministerial Decision No. 215 of 2019. These regulations have now been repealed and replaced by the new Cabinet resolution No. 57 dated 10th August 2020 and Ministerial Decision No. 100 of 20th August 2020.
The scope of some relevant activities has been changed, new exemptions introduced, and some earlier provisions have been overhauled. Thus, a revised set of law regulatory articles and activity guide have been issued, and the effective date remains from 1st January 2019.
Some of the significant revisions, amendments and other changes are highlighted below: -
1. National Assessing Authority MOF has appointed the Federal Tax Authority as the National Assessing Authority ensure full ESR compliance throughout UAE. Functions of regulatory authorities have also been provided under the revised law and its regulations.
2. Definition of a Licensee: A detailed definition on Judicial person and Unincorporated partnership has been outlined. A Judicial person is a corporate legal entity with separate legal personality from its owners.
An Unincorporated partnership includes those forms of partnership’s that may operate in the UAE without a separate legal personality
3. First Reportable period: All Licensees and Exempted Licensees are subject to the ESR Regulations from the earlier of: (i) their financial year commencing on 1 January 2019, or (ii) the date on which they commence carrying out a Relevant Activity (for a Financial Year commencing after 1 January 2019).
4. Definition of a branch and its applicability has been introduced. Branches per se will go out of scope of ESR subject to certain conditions to be satisfied by their head office and parent entities. A branch shall be considered as an arm of the “Parent” and “head office”.
As there was no clarification in the repealed regulations, many UAE Business would have submitted individual forms respectively for the parent and or head office and its branches. The issue remains of duplication of Notification forms already submitted by the UAE Branch and their Parent entity. These needs to be addressed by the authorities.
5. Exempted Licensees: The following entities are now exempted from ESR Regulations subject to sufficient evidence to prove its exemption, otherwise they will also be subject to ESR regulations and the detailed annual substance test requirements.
i. An Investment Fund, subject to underlying conditions.
ii. An Entity which is Tax Resident in a jurisdiction other than UAE. The UAE Entity will have to submit the Tax Residence certificate issued by the tax authority in foreign jurisdiction in which it claims to be a tax resident.
iii. An Entity wholly owned by UAE Resident and which do not form part of MNE Group, and its activities are only carried out in the state.
iv. UAE branch of foreign Head office if its income is subject to tax in the jurisdiction of the foreign parent entity.
v. Entities directly or indirectly owned 51% or more by the UAE Governments are no longer specifically exempted as per the revised regulations. They will have to analyze as per the new criteria stated in the revised regulations now issued.
6. Revision of the definition of certain “Relevant Activities” include changes in:
i. Distribution and Service Centre Business
- The requirement for goods to be imported and stored in the UAE has been removed. Entities purchasing from a foreign related party shall now be under the ESR.
- The condition term “In connection with a business outside the state” for Services is no longer required. Any services provided to foreign related party shall trigger this definition.
ii. High Risk Intellectual Property License
The repealed Regulations had the criteria of satisfying any of the two conditions out of the three to classify as a high-risk IP client. The amended regulations have defined that all the following conditions should be met –
7. ESR Notifications Filings to respective regulatory authorities:
-The Ministry of Finance shall launch a “portal” to collect the ESR Notification forms, substance report, relevant information, and other documents. The rules and procedures are expected to be published soon.
-Re-submission of already submitted ESR notifications will have to be done again electronically, on the new MOF portal once available. Some revisions or corrections may be allowed, and cannot be ruled out, though not clarified.
-Licensees will need to submit ESR notification within 6 months of the end of financial year.
8. Other Key changes
Key take away and the Next steps required in ensuring a robust ESR compliance:
The revised law, additional guidance and clarifications now published, are timely and a very welcome development. It thus makes it imperative for all the businesses to utilize this time, to review their activities, assess and evaluate the impact of these extensive changes on their current state of prepared ness and compliances more carefully. They should now also try to identify gaps and revisions that may now be required, because of the amended guidelines.
This is important in order to mitigate the risk of avoiding any significant penalties that may be imposed by FTA due to lack and or incorrect compliance, as it will now also act as the National Assessing Authority, to enforce strict compliance from now on.
We thus strongly recommend all entities to carry out a detailed review, obtain expert consultancy guidance and risk mitigation advice from their tax advisors to ensure more robust ESR compliance outcomes.