ESR (Economic Substance Regulations) were launched in the UAE with effect from 30th April 2019. The UAE Cabinet of Ministers of UAE has now issued Updated ESR on 10th August 2020 which repeals & replaces the ESR. The Ministry of Finance in UAE has also issued updated guidance expounding the Updated ESR. The New ESR has redesigned the jobs and duties of the relevant authorities by presenting the FTA (Federal Tax Authority) as the NAA (National Assessing Authority) and rolled out certain improvements in the definitions of some significant activities. Above all, the new law has widened the extent of exemption by including more classes of licensees to benefit from the exception of ESR. The New Economic Substance Regulations in UAE requires entities from both onshore & free zone that embrace any of the accompanying activities to keep up an economic presence in the United Arab Emirates.
> Banking Business
> Insurance Business
> Shipping Business
> Lease-Finance Business
> Investment Fund Management Business
> Distribution & Service Centre Business
> Headquarters Business
> Intellectual Property Business
> Holding Company Business
> Each of the above activities is Relevant Activity that fall within the scope of the regulations.
Summary of Changes Introduces in The Updated Economic Substance Regulations In UAE
1. Definition of “Licensee”
With the Updated ESR, the definition of “Licensees†can now apply to any corporate person (incorporated inside or outside of the UAE) or an unincorporated partnership, in the UAE which conducts a Relevant Activity. And, all those natural persons, trusts, foundations & sole proprietors who were formerly considered “Licensees” under the ESR are now no longer fall in the scope of the definition.
2. Broadening of the Exemption Scope
According to the Updated ESR, the following entities are now considered exempt from the economic substance rule:
> Investment funds
> Entities who are a tax residents outside of the UAE
> Entities that are solely owned by UAE residents & which are not part of a multi-national group & only carry out their business activities in the UAE; & branches of foreign companies whose income is subject to tax outside UAE.
Previously, the ESR exemption granted only to entities with at least 51% of UAE government ownership was now no longer applied.
3. Changes to the Definition of “Connected Person”
“Connected Person” is now defined as an entity that is part of the same group as the licensee. The group is defined as “two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable thereto”.
4. Amendments to the Definition of Relevant Activities
> Distribution and Service Centre Business
Prior, for an entity to be considered inside the extent of the Relevant Activity of “Distribution and Service Centre Business” imported goods must be stored in the UAE. This necessity does not matter anymore.
Independently, services gave by entities are no longer needed to be given in connection with the business outside the UAE. This proposes any services gave to a foreign-related person would fall within the remit of the “Service Centre” member of this Relevant Activity.
> High-Risk IP Business
Following the New ESR, the definition of a High-Risk IP Licensee has been limited – the condition relating to an entity not completing any research & development, or branding, marketing & distribution as a major aspect of its core money producing activity in the UAE has been eliminated concerning to the new ESR updates.
IP-related organizations ought to rethink whether they fall inside the remit of the three limbs delineated in the updated ESR.
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New Updates of Economic Substance Regulations in UAE
23/10/2020
ESR (Economic Substance Regulations) were launched in the UAE with effect from 30th April 2019. The UAE Cabinet of Ministers of UAE has now issued Updated ESR on 10th August 2020 which repeals & replaces the ESR. The Ministry of Finance in UAE has also issued updated guidance expounding the Updated ESR. The New ESR has redesigned the jobs and duties of the relevant authorities by presenting the FTA (Federal Tax Authority) as the NAA (National Assessing Authority) and rolled out certain improvements in the definitions of some significant activities. Above all, the new law has widened the extent of exemption by including more classes of licensees to benefit from the exception of ESR. The New Economic Substance Regulations in UAE requires entities from both onshore & free zone that embrace any of the accompanying activities to keep up an economic presence in the United Arab Emirates.
> Banking Business
> Insurance Business
> Shipping Business
> Lease-Finance Business
> Investment Fund Management Business
> Distribution & Service Centre Business
> Headquarters Business
> Intellectual Property Business
> Holding Company Business
> Each of the above activities is Relevant Activity that fall within the scope of the regulations.
Summary of Changes Introduces in The Updated Economic Substance Regulations In UAE
1. Definition of “Licensee”
With the Updated ESR, the definition of “Licensees†can now apply to any corporate person (incorporated inside or outside of the UAE) or an unincorporated partnership, in the UAE which conducts a Relevant Activity. And, all those natural persons, trusts, foundations & sole proprietors who were formerly considered “Licensees” under the ESR are now no longer fall in the scope of the definition.
2. Broadening of the Exemption Scope
According to the Updated ESR, the following entities are now considered exempt from the economic substance rule:
> Investment funds
> Entities who are a tax residents outside of the UAE
> Entities that are solely owned by UAE residents & which are not part of a multi-national group & only carry out their business activities in the UAE; & branches of foreign companies whose income is subject to tax outside UAE.
Previously, the ESR exemption granted only to entities with at least 51% of UAE government ownership was now no longer applied.
3. Changes to the Definition of “Connected Person”
“Connected Person” is now defined as an entity that is part of the same group as the licensee. The group is defined as “two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable thereto”.
4. Amendments to the Definition of Relevant Activities
> Distribution and Service Centre Business
Prior, for an entity to be considered inside the extent of the Relevant Activity of “Distribution and Service Centre Business” imported goods must be stored in the UAE. This necessity does not matter anymore.
Independently, services gave by entities are no longer needed to be given in connection with the business outside the UAE. This proposes any services gave to a foreign-related person would fall within the remit of the “Service Centre” member of this Relevant Activity.
> High-Risk IP Business
Following the New ESR, the definition of a High-Risk IP Licensee has been limited – the condition relating to an entity not completing any research & development, or branding, marketing & distribution as a major aspect of its core money producing activity in the UAE has been eliminated concerning to the new ESR updates.
IP-related organizations ought to rethink whether they fall inside the remit of the three limbs delineated in the updated ESR.
5. National Assessing Authority
Though each relevant Regulatory Authority stays associated with the process of assortment and checking of data of their particular Licensees, the Federal Tax Authority has been selected as the National Assessing Authority (NAA) to supervise compliance & control of the Updated ESR. The NAA will, in addition to other things;
> Attempt appraisals to decide whether a Licensee has met the Economic Substance Test
> Impose punishments if applicable
> Hear & decide appeals
> Information exchange with particular foreign authorities.
6. Administrative Penalties Have Been Raised
> Penalties of AED 50,000 for failure to submit their reports or any relevant information to meet the requirements of the Economic Substance Tests in the first year.
> AED 40,000 for failure to submit their reports or any relevant information to meet the requirements of the Economic Substance Tests in the second year.
> The penalty of AED 50,000 for giving inaccurate information to FTA.
> AED 20,000 as a penalty for failure to submit a notification.
7. Notification Deadline
All exempted licenses notification carrying out a relevant activity should be made within a half year from their financial year-end. The reporting deadline continues as before such as within 12months after the entities’ financial year-end. Even so, all notifications of the financial year finished 31st December 2019, should be re-filed when the MOF portal goes live which is expected in quarter four of 2020. Businesses are needed to embrace a comprehensive investigation of their functions & exchanges to discover whether & how much the conditions endorsed in the ESR are suitably met. They should start the essential examination as quickly as time permits to guarantee accurate & timely compliance.
How does ARC Associates Help you?
Being the leading Economic Substance Consultant in Dubai, Sharjah, Abu Dhabi & all over the UAE we have extensive knowledge & experience in gathering & reporting company information in the UAE. We are well placed to help our clients like you to understand & respond to this new legislation & can assist you in the following ways.
> Help you in assessing whether the Economic Substance Regulations in UAE are relevant to your business.
> Provide preliminary assessments of your organization’s compliance obligations.
> Backing with preparation & filing of the Economic Substance Notification to the required standards.
> Help with the reorganization of your business operations to fulfill the economic substance test.
For more details on the Economic Substance Regulations service in Dubai, do contact us – we’d be happy to help you!
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