Economic Substance Regulations (ESR)- Tax Consultant Dubai

Economic Substance Regulations is another compliance requirement for entities registered in the UAE. The United Arab Emirates (UAE) Ministry enacted the Cabinet Resolution no. 31/2019 with effect from 30th April 2019 on Economic Substance Regulations in the UAE. This was followed by the Ministerial Decision 215 for the year 2019 giving directives for the implementation of the provisions of Cabinet Decision no. 31/2019.
One of the four criteria in the framework of OECD, is the absence of a requirement that the activity be substantial. In addition, the European Union is working to have a Tax Governance at Global Level in order to curb the Tax avoidance, evasion. The Economic Substance Regulations is in consonance with the global standard set by 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 have the minimum standards in the State. UAE is “No or Only Nominal Tax Jurisdiction” (NOON’s) environment and is in line with other jurisdictions with same environment who are parties to this framework. Economic Substance Regulations (ESR) in UAE has been recently introduced, and as a result, all UAE businesses that may be subject to these regulations should be prepared to take action and ensure compliance.

What are the Relevant Activities?

The Economic Substance Regulations apply to natural or juridical (legal) persons, including all UAE onshore and free zone companies, branches, foundations, non-profit organisations and partnerships (referred to as “Licensees“) that carry out one or more of the following “Relevant Activities” in the UAE:

Banking businesses
Insurance businesses
Investment fund management businesses
Lease-finance businesses
Shipping businesses
Headquarters businesses
Holding company businesses
Intellectual property businesses
Distribution and service center businesses

What is required under the Economic Substance Regulations?

Every Licensee which carries out one or more of the Relevant Activities must submit a notification to the appropriate regulatory authority as set out in the Economic Substance Regulations. In addition, for every financial period, any Licensee that carries out one or more of the Relevant Activities and derives income from the Relevant Activity in the UAE will be required to satisfy an “economic substance test” and submit an economic substance report with the appropriate regulatory authority within 12 months from the end of the relevant financial period. An exemption applies to companies that are at least 51% directly or indirectly owned by the Federal or an Emirate government or a UAE-based government body or authority. The appropriate regulatory authority varies depending on the type of Relevant Activity and the location in which it is undertaken. Each regulatory authority will set out the form of the reports to be filed and the mechanisms for submitting such forms.

Who are exempt?

A Licensee that is tax resident outside the UAE
An Investment Fund and its underlying SPVs / investment holding entities
A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE
A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction
Any other Licensee at the direction of the Minister of Finance

The economic substance test requires a Licensee to demonstrate that:

the Licensee and the Relevant Activity are being directed and managed in the UAE
the relevant Core Income Generating Activities (“CIGAs“) are being conducted in the UAE
the Licensee has an adequate number of employees and adequate physical assets and expenditure in the UAE

What is a Holding Company Business?

A Holding Company Business is a Licensee that: ○ Only holds equity interest(s) in juridical person(s); and ○ Only earns dividend and capital gains from its equity interest(s)
If a UAE entity undertakes any other commercial activity or earns any other forms of income, it cannot be a Holding Company Business. Where the holding of such other assets or the performance of other commercial activities constitute a different “Relevant Activity” (e.g. a Lease-Finance Business), the UAE entity would be subject to the UAE economic substance regulations in respect of that other Relevant Activity

What are the conditions for a High Risk IP business?

All of the following conditions must be for an IP Business to be considered as “High Risk” 1. The Licensee did not create the IP asset which it holds for the purposes of its business; 2. The Licenseeacquired the IP asset either from: ○ a Connected Person, or ○ in consideration for funding research and development by another person situated in a country other than the UAE; 3. The Licensee: ○ licences the IP asset to one or more Connected Persons, or ○ otherwise generates income from the asset in consequence of activities performed by Foreign Connected Persons