WHAT IS ESR?
The UAE enacted Economic Substance Regulations (Cabinet of MinistersResolution No. 31 of 2019) on 30 April 2019 and released Guidance (Ministerial Decision 215 of 2019) on the application of the Regulations on 11 September 2019. The Regulations and guidance applies in all UAE jurisdictions, including financial free zones
In consultation with the OECD and the EU, amendments to the ESR were made by Cabinet of Ministers Resolution No. (57) of 2020 (“Amended ESR”) issued on 10 August 2020, along with an updated Guidance (Ministerial Decision No. (100) of 2020, “Amended Guidance”, which contains an updated Relevant Activities Guide at Schedule 1). The Amended ESR appoints the Federal Tax Authority as National Assessing Authority that will determine whether an entity meets the Economic Substance Test and issues penalties for contraventions of the Amended ESR.
Key points mentioned in the Updated ESR include:
- Branches of any UAE company do not need to file separate ESR notification- The new ESR regulation states that when a UAE company has a branch in UAE with a single parent company for all of them. It is not required for all the branches to file the ESR notification separately. All that you have to do is file a single notification that will mention all your relevant activities of your parent company based in UAE along with the activities of all your branches.
- Licensees’ definition changed- Licensees are required to comply with the New ESR, but its definition changed which now only applies to a corporate person, incorporated outside or inside of the UAE, or an unincorporated partnership where each partner much have a presence in the UAE and conduct a Relevant Activity.
A natural person, sole proprietor, trust, or foundation has been omitted from the list. The Licensees list also includes some exemptions such as investment funds, entities completely owned by residents of the UAE and which carry out their activities only in the UAE, Outside UAE tax residents’ persons, foreign parent companies branches where the income is subject to tax outside the UAE. Most of the entities owned by the government of the UAE are no longer exempted unless they fall within any of the exempted categories in the updated ESR.
WHO ARE EXEMPTED FROM THE ESR ?
The ministerial decision no. 100 for 2020 on the issuance of directives for the implementation of the provisions of the cabinet decision no 57 of 2020 provides insight into the type of entities that are exempted, licensees. As per the ministerial decision, an exempted licensee means any of the following:
1. An investment fund
2. A licensee which is a tax resident in a jurisdiction other than the UAE
3. An entity wholly owned by one or more residents in the UAE provided its not part of an MNC Group and only carries out business in the UAE
4. Branch of a foreign entity whose relevant income is subject to tax outside the UAE
5. Any other Licensee as determined pursuant to a decision of the Ministry of Finance
ESR Obligations of Exempted Licensees
Entities that are defined as exempted licensees need to file ESR notifications only, along with the documents to substantiate their exempt status to be excluded from the ESR. However, if a business fails to provide sufficient evidence to substantiate its status as an exempted licensee, the authorities will regard the entity as a licensee and will have to meet the Economic Substance test and file the ESR report.
How should Each Licensee substantiate their Status?
Each type of exempted licensees is required to provide a pre-defined set of documents as evidence of exempted status. Consider the following breakup for understanding the documents required for proving the exempted status of the entities.
Licensee Wholly Owned By UAE Resident
The exempt licensee wholly owned by a UAE national or UAE resident but is not part of a multinational group and having operations only in the UAE must submit shareholder register, structure chart, proof of nationality and/or residency of shareholder(s), and copy of financial statements.
An investment fund can substantiate exempt status by filing a copy of statutory documents, a copy of the PPM/information memorandum, copy of the investment fund’s license and registration (for a fund established in a jurisdiction outside the UAE). Further, a special purpose vehicle (SPV) or holding company of an investment fund is required to provide a structure chart
of the fund and its subsidiary investment entities. Or evidence of the investment fund status of the fund that has incorporated the UAE entities.
Licensee which is Tax Resident outside the UAE
An exempted licensee, who is resident outside the UAE, should submit details of the country in which it claims to be a tax resident, tax identification number issued by the country, and a letter or certificate of an assessment to corporate income tax and evidence of its payment.
A UAE branch of a foreign company with all of its income subject to tax in the jurisdiction of the foreign company is an exempted licensee. Here, a common mistake done by businesses is that they fail to check whether the foreign head office is paying taxes on the branch or not. Merely having a branch in the UAE does not qualify for exempt status, it has to pay taxes on the branch revenue in the tax jurisdictions of head office. In this case, the entity should furnish details of the country in which the parent company is resident for tax purposes, a tax identification number issued by a relevant foreign tax authority, and a copy of the tax returns.
Failure to meet the Exempted status
Any licensee who fails to meet the exempted status or fails to provide the required supporting documents are required to meet the Economic Substance Test concerning relevant activity carried out by them and are required to file the ES Report. The businesses should be warned about the following ESR penalties:
1. Non-filing of notification will attract a penalty of AED 20,000
2. Non-filing of ES Report will attract a penalty of AED 50,000 (if no proper supporting documents are provided to claim the exempt status) and if the same violation continues in the subsequent year also will attract a penalty of AED 400,000
3. Providing inaccurate information will attract a penalty of AED 50,000
Why should you seek help in the ESR Filing?
The amended UAE ESR law states that the entities that don’t conduct relevant activities need not submit ESR Notification. Even then it is possible that the business that doesn’t qualify for ESR in one year may become so in the subsequent year. In such a case, the businesses should assess their ESR status every year. Also, Exempted Licensees require assistance in terms of providing proper documents and filing ESR notifications. These situations warrant the assistance of the best ESR consultants in the UAE such as Fair and Square accounting and Bookkeeping services (F&S). F&S provides effective advisory in filing ESR notification and reports with sufficient documents. F&S also advises the Licensees on how to meet the ESR test in compliance with the existing laws.