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The ESR Regulations are issued pursuant to the global standard set by the Organisation for Economic Co-operation and Development (“OECD”) Forum on Harmful Tax Practices, which requires entities undertaking geographically mobile business activities to have substantial activities in a jurisdiction.
In addition to the work of the OECD, the European Union Code of Conduct Group (“EU COCG”) also adopted a resolution on a code of conduct for business taxation which aims to curb harmful tax practices.
On 30 April 2019, the Cabinet of Ministers of the United Arab Emirates (“UAE”) issued Cabinet Resolution No. 31 of 2019 Concerning Economic Substance Regulations (“Resolution 31”). On 10 August 2020 amendments were introduced to Resolution 31 by the Cabinet of Ministers by way of Cabinet of Ministers Resolution No. 57 of 2020 which repealed and replaced Resolution 31.
So, Entities will now have to comply with Cabinet resolution 57/2020 & Ministerial Decision 100 for the year 2020 giving directives for the implementation of the provisions of Cabinet Decision no. 57/2020.
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).
Applicability of Economic Substance Regulations in the UAE
The regulations for Economic Substance in UAE apply to all licensee such as natural & juridical persons who performing the related activities in the UAE together with the licensee in the Financial free zone and Free Zone. In other words, The Regulations apply to all onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to keep an acceptable “economic presence” in the UAE comparative to the actions they take on.
1. What are the Relevant Activities under Economic Substance Regulations in the UAE?
2. Business Exempted from ESR
Now the commercial companies which have any level of direct or indirect government (state and/or federal) ownership are out of the scope of the Regulations. The requirements of the Regulations will not apply to Companies in which the UAE Federal Government or any governmental authority or body or the Government of any Emirate of the UAE, or any of them has at least 51% indirect or direct ownership in their share capital.
3. Economic Substance Test
To satisfy the economic substance requirements with a Relevant Activity, a Relevant Entity must comply with:
It should be noted that Licenses carrying out a holding company business or a high-risk IP business are subject to different economic substance test requirements. Likewise, CIGAs differ for each of the Relevant Activities, & a non-exhaustive list is comprised in Cabinet Resolution No. 31/2019.
4. First reportable Financial Year
The Regulations put on to financial years early on or after 1st January 2019. Declarations must be submitted within 12 months from the end of the relevant financial year.
Example:
5. Penalty for Non- Compliance
Non-compliance with the Regulations may lead to administrative penalties (not less than AED 10,000 but not above AED 50,000 in the first year, increased to an amount not less than AED 50,000 but not above AED 300,000 in the following year), subject to a 6-year limitation period. Other penalties like suspending, canceling, or not restarting the UAE Relevant Entity’s trade license could also apply.
6. Economic substance regulations reporting defined for mainland companies in the UAE
All the mainland companies that fall under the economic substance regulations in UAE need to notify their respective competent authorities that they undertake a Relevant Activity and the notifications need to be filed in the prescribed manner.
All the licensees of the mainland companies that are not exempt and undertake a Relevant Activity which they earn income from during a relevant Financial Year are required to meet the economic substance requirements. A Relevant Entity in the mainland will be required to report certain information on its Relevant Activities on an annual basis to the relevant regulatory authority.
Existing entities in the mainland refer to an entity with an existing trade license in the UAE on the effective date of the Regulations, being 30 April 2019. It must comply with the regulations from 30 April 2019, with the first return due in 2020
New entities in the mainland refer to an entity that receives a trade license on or after the effective date of the Regulations, being 30 April 2019. It must comply with the Regulations upon receiving its trade license, with the first return due in 2020.
HOW ARC ASSOCIATES CAN HELP YOU TO COMPLY WITH ECONOMIC SUBSTANCE REGULATIONS IN UAE (ESR)?
ARC Associates act as an Economic Substance Regulations consultant in Dubai, Abu Dhabi, Sharjah, and all over in UAE and can assist the mainland companies in the evaluation of relevant activities performed in the year and also in the evaluation of the total income generated from each of the relevant activities in the UAE to comply with the mainland Economic Substance Regulations in UAE.
If you are concerned that the Regulations may apply to you and are unsure about it and the next steps you should be taking, we would be happy to assist you for assessment on ESR in the following way:
ARC Associates being an Economic Substance Regulations Consultant in the UAE will also assist the mainland companies in filing the notification to the relevant authority and also to submit the ESR returns on time to avoid the penalties. New entities can also take advice from ARC Associates so that the organizational structure could be reviewed as per the ESR policies and rules and proper changes in the structure could be made to comply with all the Economic Substance Regulations defined for the mainland companies in the UAE.