Economic Substance Regulations

Authoritative Changes

The UAE Economic Substance Regulations (ESR), initially introduced on April 30, 2019, through Ministerial Resolution No. 31 of 2019, have undergone a significant transformation. This overhaul came into effect when the Cabinet of Ministers officially endorsed Resolution No. 57/2020 on August 10, 2020.

MoF: Catalyst of Change

In tandem with the amendments, Ministry of Finance (MoF) Decision No. 215 of 2019 has been rescinded and replaced by MoF Decision No. 100/2020, ratified on August 19, 2020. Both the resolution and the decision were made accessible to the public on September 2, 2020.

Unveiling Pertinent Activities

The essence of Relevant Activities (Simply Solved) remains unchanged within the ambit of Economic Substance Regulations. Companies engaging in any of the listed Simply Solved activities are required to submit an ESR Notification and demonstrate economic substance if they meet certain criteria.

Exploring Simply Solved Categories

The roster of Simply Solved encompasses various sectors:

  • Banking business
  • Insurance business
  • Investment fund management business
  • Lease-finance business
  • Headquarters business
  • Shipping business
  • Holding company business
  • Intellectual property business
  • Distribution and Service Center business

However, it’s crucial to note that certain amendments have been made to the definitions of the following Simply Solved, potentially affecting a company’s classification.

Revisiting “Applicable Activities”

Two significant revisions merit attention:

  1. Expansion of Distribution and Service Center Business: The scope of this category has been broadened, eliminating the necessity for goods to be imported and stored in the UAE. Additionally, there’s no longer a requirement for services to be provided “in connection with a business outside the State.”
  2. High-Risk Intellectual Property Licensees: The definition now pertains to a protected intellectual property business that meets specific criteria.

Introducing “Associated Person” and “Group”

  • Associated Person: Refers to an entity within the same Group as the Licensee or the Exempted Licensee.
  • Group: Comprises two or more entities associated through ownership or control, necessitating the preparation of consolidated financial statements.

Understanding Licensee

Key changes to note include the reclassification of Licensee, now applicable to:

  • Juridical entities
  • Unincorporated businesses conducting significant activities in the UAE

Individuals, sole proprietors, trusts, and foundations are no longer within scope, thereby exempt from filing a notification or meeting the Economic Substance Test.

Navigating Branches

Although branches are excluded from the definition of “Licensees,” they, along with their parent or headquarters, are obligated to comply with the revised ESR.

  • UAE Branch of a UAE Business: Required to submit a single notification and, if applicable, an Economic Substance Report.
  • UAE Branches of Foreign Businesses: Exempt if their relevant income is reported in the tax return of the foreign parent/head office.

Exploring Exclusions

The amended regulations offer exemptions to:

  • Entities tax resident outside the UAE
  • Investment Funds
  • UAE residents solely conducting business activities within the UAE
  • UAE branches of foreign headquarters/parents subject to taxation in their jurisdiction

Emphasizing Compliance and Penalties

The revised regulations empower the UAE Federal Tax Authority (FTA) to:

  • Assess compliance with the Economic Substance Tests
  • Impose administrative penalties for non-compliance
  • Adjudicate appeals filed by Licensees

Penalties for non-compliance have been augmented, emphasizing the significance of adherence to the regulations.

Implications for UAE Businesses

  • No action required for companies not engaging in Simply Solved activities.
  • Companies with Simply Solved activities but no income generated are required to file an ESR Notification via the MoF portal.
  • Entities falling under exempt categories must file an ESR Notification and provide evidence of exempted status through the MoF portal.
  • Companies with income from Simply Solved activities must file an ESR notification and submit an ES Report demonstrating compliance by December 31, 2020.

In conclusion, the revamped UAE Economic Substance Regulations herald a paradigm shift in regulatory compliance, necessitating meticulous adherence to ensure seamless operations within the UAE’s business landscape.

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