UAE Economic Substance Regulations Update | Latest ESR Updates

September 29, 2020by Mohammed Rahali

The most recent UAE Economic Substance Regulations Updates have seen substantial modifications and now require re-assessment and re-submission of notification. In addition, the UAE Economic Substance Regulations (ESR) Report is due for submission as soon as possible.

Contact our corporate team for assistance.

In Brief

Following the ES substantial changes (Cabinet of Ministers Resolution No. 57 of 2020), UAE Licensees should re-evaluate the applicability of ESR to their businesses.

They should also resubmit their ES notifications for the year end 2019, with any changes required to the information already filed with the relevant regulatory authorities.

Administrative penalties of up to AED400, 000 have also been introduced along with suspension or non-renewal of trade licenses.

· After the First phase of submission (by 30th June 2020), all Licensees need to complete a reassessment in accordance with the new ES rules (10th August 2020) to ensure compliance.

·  Licensees are required to re-submit their 2020 ESR notification. Further clarification on which Licensees this applies to is to be confirmed.

· For the Second phase of submission, Licensees that earn income from a “Relevant Activity” during the relevant financial period & that are not exempt from ESR are required to demonstrate economic substance in the UAE & file an ESR report within 12 months from the end of the relevant financial period.

UAE Economic Substance (“E.S.”) Revision:

New Cabinet of Ministers Resolution No 57 of 10Th August 2020 revoking and replacing the Cabinet Resolutions No 31 & No. 58 of 2019 along with clarifying Guidance, Ministerial of Finance Decision 100 of 2020 dated 19 August 2020, replacing Ministerial Decision No. 215 of 2019.

 What are the key changes introduced by the new UAE ESR Resolution:

Due to the following substantial changes and clarifications on the ESR requirements, UAE Licensees should assess the impacts on their compliance and reporting obligations:

  1. The New Guidance is applicable from retrospective date of 1st January 2019. 
  1. Exempted Licensees:

 A New list of exempted entities have been identified and the 51% government ownership exemption has been removed.

The following Licensees are exempted from being subject to the Economic Substance regulations:

  1. Investment Fund (Removal of Investment Funds as part of Investment Fund Management relevant activity unless it is a self-managed fund);
  2. Licensee that is not tax resident in the UAE (a Licensee that is tax resident in a jurisdiction other than the UAE);
  3.  Licensee that is ultimately wholly and beneficially owned (directly or indirectly) by UAE resident(s) and:

(1).  is not part of a MNE Group (multinational group), [which consists of any Group that includes (a) at least two entities tax residents in different jurisdictions; or (b) an entity that is tax resident in one jurisdiction and subject to tax in another jurisdiction for activities carrying out through its branch or permanent establishment.]; and

(2). only carried out its activities in the UAE.

  1. Licensee that is a branch of a foreign entity and of which the relevant income from the relevant activity is subject to tax in a jurisdiction other than the UAE; and
  2. Any Licensee as determined pursuant to a decision of the Minister of Finance as Exempted Licensee.

Entities directly or indirectly owned at least 51% by the UAE government are no longer exempted under the new ESR, unless they can avail of one of the above exemptions.

An Exempted Licensee shall submit with its Economic Substance Notification all required information and documents (e.g. tax certificates and tax assessments), to evidence that it is eligible for the exemption to meet the Economic Substance requirements, to its Regulatory Authority (i.e. the authority which issued its trade license). Exempted licensees do not have to pass the economic substance test but do have to submit an economic substance notification with supporting evidence.

  1. National Assessing Authority:

The Federal Tax Authority (“FTA”) shall be responsible as the National Assembly Authority for assessing whether a Licensee or an Exempted Licensee has met the Economic Substance Test, applying administrative fines and Reporting to the Ministry of Finance (when necessary).

The Regulatory Authorities shall be responsible for collecting, reviewing the accuracy of notifications and reports and reporting to the FTA.

  1. Update to Distribution and service centre business definition:

The scope of this Relevant Activity has been expended by:

  1. Adding Licensees that purchase goods from foreign connected persons and resell these goods in or outside the UAE.
  2. Adding Licensees that provide services to Foreign Connected Person in connection with a business in or outside the UAE.
  • Removing the following requirements:
    – for goods to be imported and stored in the UAE; and
    – for services to be provided in connection with a business outside the UAE.
  1. Update to High-Risk Intellectual Property (“IP”) Licensee definition:

It has been restricted to a Licensee that carries on an intellectual property Business for which he:

  1. did not create the intellectual property asset held for its business;
  2. acquired the intellectual property asset from either (a) a Connected Person or (b) in consideration for funding research and development by another person situated abroad; and
  • Licenses or has sold the intellectual property asset to a Connected Person or earns separately identifiable income from a Foreign Connected Person in respect of the use or exploitation of the intellectual property asset;
  1. by removing “Licensee that does not carry out research and development, or branding, marketing and distribution as part of its State Core Income Generating Activity”.
  1. Update to Definition of a “Licensee”:

It has been restricted by removing “natural person” and enlarged by including any UAE registered juridical / legal person (UAE or Foreign incorporated) and unincorporated partnership (limited or general partnership).

Natural persons, sole proprietors, trusts are no longer considered Licensees.

No reference is made anymore to the granted license by the competent licensing authority to define a Licensee. Instead registration is referred to.

However, Foundations are still considered as Licensee.

  1. Update to Definition of a “Connected Person”: 

It has been restricted to “An entity that is part of the same group as the Licensee or exempted Licensee by amending the former definition “a natural or juridical person who is related to one or more natural or juridical person(s) through direct or indirect ownership or control, or common control.”

  1. Clarification on branches:

Branches of UAE companies within the UAE will not be considered as separate legal entities in terms of ESR but rather as extensions of the parent company. They will not need then to submit separate ESR notification.

  1. Reporting deadlines:

ES Notification and re-notification must be submitted electronically via MOF (Ministry of Finance) online portal:

ES Notification is required to be submitted within 6 months after the end of respective financial year.

MOF Re-notification in respect of previously filed notifications is required: Licensees that have already submitted their ES Notification to the Regulatory Authority are required to re-submit it via the portal of the Ministry of Finance once available.

ES Report must be submitted within 12 months after the end of the financial year. The format of the ES Report will be published by the National Assessing Authority (FTA).

  1. Revised list of Sanctions and Penalties:

Failure to submit ESR Notification – AED 20,000

Failure to submit ESR Report – AED 50,000 and Failure to provide accurate or complete information – AED 10,000 to AED 50,000. The same violations in a subsequent year, a fine of AED 400,000 and any other administrative procedures (suspension, withdrawal or non-renewal of the license).

Failure to demonstrate Economic Substance – First Failure – AED 50,000, Second Failure – AED 400,000 and information exchanged with Foreign Competent Authority of (i) Parent Company, (ii) Ultimate Parent Company and (iii) Ultimate Beneficial Owner.

What are the submission duties? Annual notification form & UAE Economic Substance report:

The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority, and complete and submit to the same Regulatory Authority an Economic Substance Report within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019).

An entity is not required to meet the Economic Substance Test and file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt. A Notification form needs to be submitted regardless.

Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent as well as other administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.”

How can we assist you?

Wincore Advisory Group can assist you in this regulatory self-assessment to fulfil your compliance legal responsibilities by:

  • Assistance with the reassessment of your entity in accordance with the new UAE ESR;
  • Assistance with filing UAE ESR re-notification / annual notification/ reporting.
  • to get a clear view of the new regulations and your entity’s categorisation
  • reviewing internal corporate governance, Management information system and ESR criteria fulfilment
  • implementing the most cost & time effective compliant (implementing contractual and delegation arrangements) strategy to help you pass the economic substance test
  • Provision of professional directorships, board support services, company secretarial/administrative services and registered office/meeting space;

Outsourcing this function to Wincore Advisory Group enables you to meet your obligations in the most efficient way and avoid to waste valuable time and energy in establishing an in-house process.

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Mohammed Rahali

Managing Partner | E: m.rahali@wincoreadvisory.com | M: +971 (0) 55 138 9591

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