The United Arab Emirates (UAE) has recently unveiled its updated UAE Economic Substance Regulations (ESR) on August 10, 2020, via Cabinet Resolution no. 57 of 2020. This update repealed Cabinet Resolution 31 of 2019 and also provided a refreshed guidance note, issued on August 19, 2020, through Ministerial Decision no. 100 of 2020.

Understanding the ESR Regulations

All entities registered in the mainland and free zones of the UAE are now required to adhere to the new ESR Regulation. If these entities engage in significant activities and derive relevant income from those activities, they must fulfill the “Economic Substance Test.”

The enforcement of the new ESR will be retrospective, applying to all licensees in the UAE from January 1, 2019. Entities engaged in significant activities are required to re-submit the notifications filed for Financial Year (FY) 2019. Additionally, the ESR report must be uploaded onto the portal within a year following the completion of the licensee’s FY (the first report is due by December 31, 2020, for the FY ending in December 2019).

Key Amendments in the ESR Economic Substance Regulations

1. Licensee Definition

The term “Licensee” refers to a juridical entity (incorporated within or outside the UAE) or an unincorporated company conducting significant activity.

Note: Natural persons, sole proprietorships, trusts, and foundations are excluded from the scope of “licensees” under the ESR.

2. Excluded Licensee

Entities falling under certain categories are excluded from the regulations, such as Investment Funds, entities tax resident in jurisdictions other than the UAE, entities wholly owned by UAE residents conducting all activities solely within the UAE, and licensees that are part of a foreign entity whose Relevant Income is taxable elsewhere.

3. Associated Individual and Group

  • Associated Person: An entity part of the same group as the licensee or the exempted licensee.
  • Group: Two or more entities correlated through ownership or control, necessitating the preparation of consolidated financial statements for reporting purposes.

4. Distribution and Service Center Business

The definitions of “Distribution Business” and “Service Center Business” have been revised. Under the new ESR, a licensee engages in “Distribution Business” if it acquires goods from a foreign group company and distributes those goods, eliminating the previous requirements of importation and exportation from the UAE. Similarly, the definition of “Service Center Business” no longer requires the services to be associated with a business outside the UAE.

5. Holding Company Business

The ESR now exclusively defines Holding Company Business as a business solely engaged in acquiring and holding shares or equitable interests in other companies and earning dividends and capital gains from its equitable interest.

6. Public Assessing Authority

The UAE Federal Tax Authority (FTA) is designated as the National Assessing authority, while the relevant regulatory authority will collect information and documentation from the licensees.

7. Compliance during Liquidation

Licensees and Exempted Licensees remain subject to ESR regulations until their existence ceases. Even during liquidation or winding-up, if the entity continues relevant activities and earns significant income, it must ensure compliance with ESR regulations.

8. Treatment of Branches

  • UAE Branch of a UAE Company: UAE branches are not considered separate legal entities if their parent company is registered in the UAE. A single notice/report is filed by the parent company.
  • Foreign Branch of a UAE Company: If the entity is registered in the UAE and has foreign branches conducting significant activities abroad, compliance with ESR regulations is required provided the foreign branch is taxed on all relevant income in the foreign jurisdiction.
  • UAE Branch of Foreign Company: UAE branches of foreign companies are exempt from ESR compliance if their significant income is taxed in the foreign parent jurisdiction.

The revised ESR necessitates companies to reassess their business activities to determine if they engage in significant activity. Expert firms like Simply Solved in UAE can assist in aligning entities with the new ESR regulations, offering guidance on notifications, report filing, and other corporate services in line with ESR guidelines.

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