The Economic Substance Regulation was amended in August 2020 by the UAE Cabinet of Ministers.
Read to know more about the Introduction of Economic Substance Regulation in the UAE here.
Definition of a Licensee
The amended ES Regulations only apply to Licensee – judicial person, unincorporated partnerships that carry relevant activity in UAE.
Changes to the Economic Substance Regulation in UAE
- Natural persons, sole proprietors, trusts and foundations are no longer considered as ‘Licensees’ under the scope of ES regulations (Previously these groups were added).
- Companies or owners under the specified group need not file a notification or satisfy the Economic Substance Test.
- There are amendments to ESR on the way of treating UAE based branch of a company and Foreign Branches.
Applicable Exemptions from Economic Substance Regulation
- Entities that are Tax Resident outside the UAE
- Investment Funds does not come under ES regulation filing.
- Businesses that are completely owned by UAE Residents and not part of any Multi-National Group and only operates in UAE
- UAE Branches of a foreign company whose income is subjected to tax in the home country of the foreign company
All the exempt entities must file a notification and provide substantial documents to benefit from the exempt status.
The companies in UAE must be having a Tax Residence Certificate and the foreign companies at the home country that will provide the proof as a tax resident in a respective country where the business is operational.
Government or Semi-Government Entity Are Exempted
Businesses directly or indirectly owned (at least 51% by the UAE Government) are exempted from ES regulations.
Changes to Definition of “Relevant activities”
1. Distribution and Service Centre Business
There is no requirement for Companies in UAE to import and store goods to be known as a “Distribution and Service Centre Business”
Also, the company need not be providing services outside UAE to a foreign-related party to be considered in UAE as a “Distribution Service Centre Business”
2. High-Risk Intellectual Property Licensee
Businesses that meet the following criteria are grouped under ‘High-Risk Intellectual Property Licensee’
- The business has not created the Intellectual Property (IP) but has acquired the IP Asset.
- The IP Assets can be obtained by either:
- Connected Person, or,
- For funding research and development by another person situated in a foreign jurisdiction
The IP Company has either sold the IP asset to a connected person or earns an identifiable income from the Foreign Connected Person in return of using the IP rights.
Changes to the definition of a ” Connected Person” and introduction of a new definition of a “Group”
The amended ES regulations define a Connected Person as an entity that is part of the same group as the Licensee or the Exempted Licensee.
A group is defined as ” two or more entities related through ownership or control such as that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards.
Treatment of Branches
Branches are not regarded as Licensees as they don’t have a separate legal personality from their parent or head office company.
The Parent or head office companies must comply with the ES regulations by stating the following:
1. UAE branch of a UAE Company
The UAE Company must file a single notification and an Economic Substance Report ( if applicate) to state the relevant activities of the company and its branches in UAE.
2. UAE branches of a Foreign Company
The UAE branch is not subject to the ES regulations if the relevant income is reported in the tax return of the foreign company in the home country.
3. Foreign Branch of a UAE Company
The UAE business need not report the relevant activities of the foreign branch in UAE, provided the foreign branch is subject to tax on its relevant income in the foreign jurisdiction.
Governance of Economic Substance Regulations
The UAE Federal Tax Authority is the Assessing Authority for the ES Regulations.
FTA will be enforcing the compliance of UAE Business with the Economic Substance Test.
The regulatory Authority will collect and verify the information regarding the Licensees and update the systems to ensure the entities in UAE are complaint to ES Regulations.
Exchange of Information
The Ministry of Finance (competent Authority) as per amended ES regulations will exchange information either the Foreign Competent Authorities on Licensee that claims to be exempt from the ES regulations based on:
- Being a Tax Resident outside the UAE; or,
- Being a UAE Branch of a foreign entity whose income is subject to tax outside of the UAE
Economic Substance Filing – Notifications
The notification for ES regulations must be filed electronically on the Ministry of Finance Portal within Six months of financial year-end
Any delay in filing and complying to the Economic Substance regulation test for Licensees falling under the relevant activity bracket will levy fines.
- The Licensee is not required to perform all the Core Income Generating Activities listed in the ES regulations for a particular relevant activity. However, the activities that generate income must be performed in the UAE
- The board members/ directors are not required to be physically present in the UAE when taking strategic decisions on daily operations.
- A Licensee may outsource activities which are not Core Income Generating Activities to parties outside the UAE.
- Activities such as back-office functions, IT, Payroll, Legal services, or any expert professional advice, or specialist services provided, etc., can be outsourced.
- The amended ES Regulations and Guidance provide clarity on the scope and application of the Economic Substance requirements in the UAE.
- Also, the clarifications regarding the treatment of branches are helpful to businesses operating in the UAE in planning their tax savings accordingly.
UAE Entities must assess their business activities and ensure they fall within the scope of the Economic Substance Regulations, and meet the Economic Substance Test requirements and comply with the ES regulations to avoid any penalties.
To know more about Economic Substance Regulations, talk to our experts Business Consultants right away!
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