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Economic Substance Regulations is a compliance requirement for entities registered in the UAE. The Economic Substance Regulations is in consonance with the global standard set by the Organization for Economic Co-operation and Development (OECD) on Harmful Tax Practices. UAE also joined the all-inclusive framework of OECD on Base Erosion and Profit Shifting (BEPS) and is committed to having the minimum standards in the State.
The United Arab Emirates (UAE) Ministry first enacted the Cabinet Resolution no. 31/2019 on Economic Substance Regulations in the UAE. Ministerial Decision 215 for the year 2019 giving directives for the implementation of the provisions of Cabinet Decision no. 31/2019 followed. However, On 10th August 2020 New Economic Substance Regulation was introduced in the UAE via Cabinet Resolution 57/2020 revoking Cabinet Decision no. 31/2019. Also, Ministerial Decision No 100 for the year 2020 replaced Ministerial Decision 215 for the year 2019.
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.
ENTITIES WHO HAVE ALREADY SUBMITTED NOTIFICATION IN JUNE ARE REQUIRED TO SUBMIT AGAIN UNDER NEW ESR.
Licensee now covers i) juridical persons (incorporated inside and outside the UAE); or ii) unincorporated partnerships; which are registered in the UAE and that conduct a relevant activity. Natural persons, sole proprietors, trusts and foundations are no longer in scope of the New ESR.
The treatment of UAE and foreign branches has been clarified. Broadly, branches registered in the UAE are now seen as an extension of their parent or head office and do not have separate legal personality. Branches being subject to corporate income tax at head office level may be exempt from the application of the New ESR.
New exemptions include: i) Investment funds, ii) entities tax resident outside UAE, iii) UAE resident owned businesses not part of a MNE Group and with only domestic transactions and iv) branches of foreign companies being subject to tax outside the UAE. The government ownership exemption has been withdrawn.
Clearer guidance on which transactions would be treated as performed between related persons.
Distribution and Service Centre Business in the New ESR excludes the reference to ‘import and store the goods in the UAE’. Therefore, if a UAE entity is purchasing and selling goods but the goods do not physically enter/are stored in the UAE, the entity would be considered conducting a relevant activity.
Penalties for non-compliance have been increased significantly.
The Federal Tax Authority (FTA) has become the “National Assessing Authority” to oversee compliance and control with the New ESR. The Regulatory Authorities will remain involved providing support to the FTA.
The Economic Substance Regulation is applicable to all licensees & exempted licensees carrying on the relevant activities in the UAE, including the Free Zone or Financial Free Zone; with effect from the year 2019.
Banking Business
Lease-Finance Business
Shipping Business
Insurance Business
Holding Company
Intellectual Property Business
Investment Fund Management Business
Headquartered Business
Distribution & Service Centre Business
Assessing whether the entity is engaged in relevant activity will determine whether the entity is required to comply with Economic Substance Regulation in the UAE. Substance over form approach must be followed in assessing the activities. Even passive income from any of the activity falling within the definition of relevant activity would require an entity to comply with the regulation. Incorrect assessment may lead to the filing of inaccurate information and may further lead to penalties.
| Financial Year -end | The due date for ESR Notification | The due date for ESR Report |
|---|---|---|
| 31st Dec 2019 | 30th June 2020 Re-submission on MOF portal by 31st Dec 2020 | 31st Dec 2020 |
| 31st Mar 2020 | 30th Sep 2020 Re-submission on MOF portal by 31st Dec 2020 | 31st Mar 2021 |
| 30TH Jun 2020 | 31st Dec 2020 on MOF portal | 30th Jun 2021 |
| 30th Sep 2020 | 31st Mar 2021 on MOF portal | 30th Sep 2021 |
Phase I: To study your Business Activities in detail and assess the applicability of Economic Substance Regulation on your activities. Also, to provide support and guidance on filing notification with the Relevant Authority.
Phase II: Reporting with Regulatory Authority on or before the Due Date.
Phase II: Reporting with Regulatory Authority on or before the Due Date.
Phase III: To provide the guidance and support for compliance with the provisions of the Economic Substance Regulation, if your activity is falling under the regulation. To conduct Impact Study and Gap Analysis in order to assess whether the Business meets the Compliance test and to provide the recommendations.
PENALTY FOR FAILURE IN SUBMISSION AED 20000
PENALTY FOR INCORRECT SUBMISSION AED 50000