Economic Substance Regulations

The amended ESR legislation and guidance are as follows:

• Cabinet of Ministers Resolution No. 57 of 2020 revoking the erstwhile ESR regulation

• Ministerial Decision No. 100 of 2020 (Guidance) including the Relevant Activities guide

The FAQs are also published by the Ministry of Finance on their website along with the flowchart.

The amended ESR legislation has brought in certain changes. Some of these which may require the licensee to re-assess are:

• Legal type of licensees covered under ESR. Refer Q4 below for details
• Treatment of branches. Refer Q9 below
• Definition of certain Relevant Activities. Refer Q5 below
• Exemptions. Refer Q8 below.

ESR applies to all judicial persons licensed with DHCA carrying on one or more "Relevant Activities" in UAE.

The following persons are not covered under the Regulations:

• A natural person
• A sole proprietorship
• A Trust
• A Foundation

Further, ESR is not limited to companies which are a part of foreign multinational group.

If a Licensee does not undertake any Relevant Activity, it does not have comply with the ESR.

The Relevant Activities under the Economic Substance Regulations are:

• Banking Businesses
• Insurance Businesses
• Investment Fund Management Businesses
• Lease-Finance Businesses
• Headquarters Businesses
• Shipping Businesses
• Holding Company Businesses
• Intellectual Property (IP) Businesses
• Distribution and Service Centre Businesses

The MoF has released guide for relevant activities which is attached as an annexure to the Ministerial decision.

It is important to note that there has been changes to the definition of Distribution and Service Centre Business and High Risk IP business.

The old definition of a 'Distribution and Service Centre Business' required the purchase of goods from a Foreign Connected Person, importing goods into UAE and subsequently reselling them outside UAE. This was amended to exclude the requirement to import and export goods from UAE. The new definition now only requires the purchase and resale of goods.

The definition of a Distribution and Service Centre Business has also been amended to exclude the requirement of the services to be in connection with a business outside UAE. Therefore, licensees providing any services to a Foreign Connected Person will now qualify as service center business.

The definition of a High Risk IP business has been narrowed. The condition relating to a licensee not carrying out any research and development, or branding, marketing and distribution as part of its core income-generating activity in the UAE has been removed in the new definition.

No, substance over form approach should be adopted. The licensee is required to look beyond what is stated on the commercial license for the activities actually undertaken during the financial period.

The licensee is not required to comply with the ESR tests. However, the licensee is required to submit the notification for ESR.

The following licensees are exempt from ESR under the amended Regulations:

• 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.

Please note that sufficient evidence must be submitted along with the Notification form to claim any of the above exemptions.

There are three types of branches:

• Local branches of UAE entity
• UAE branch of foreign company
• Foreign branch of UAE entity

The matters to be considered for each of these scenarios is listed below:

• Local branches registered in the UAE are an extension of their parent/head office and do not have separate legal personality. Therefore, the entity with its head office registered in the UAE must file ESR notification and report as a single Licensee, reporting the Relevant Activities of itself and all its branches.
• A UAE branch of a foreign entity that carries out a Relevant Activity will be within the scope of ESR as if it were a separate legal person, unless the branch is claiming exemption from ESR.
• The UAE entity is not required to consolidate the activities and income of the foreign branch provided the Relevant Income of the foreign branch is subject to tax in the foreign jurisdiction where the branch is located.
• In this context, a branch can include a permanent establishment or any other form of taxable presence for corporate income tax purposes which is not a separate legal entity.

The Reportable Period is the financial period commencing from 01 January 2019.

For example- An entity having financial year starting 1 January 2019 to 31 December 2019, the reportable financial year under ESR will be 1 January 2019 to 31 December 2019.

All the licensees in DHCA within the scope of ESR and licensees claiming exemption are required to submit an annual notification under ESR within 6 months from the end of its financial year.

Non-exempt licensees who earn income from Relevant Activities during a particular financial year will also be required to file an annual report under ESR within 12 months from the end of its financial year.

All the licensees in DHCA within the scope of ESR (i.e. performing a Relevant Activity) and licensees claiming exemption are required to resubmit a notification. We will provide an update on the method of this re submission shortly.

Licensees having financial year commencing on or after 1 January 2019 and ending 31 December 2019 is 30 June 2020.

There is no statutory requirement to file the notification by 30 June 2020. The notification deadline will be announced shortly.

No penalties will apply if a notification for financial years ending after 31 December 2019 is not submitted by 30 June 2020.

No, in the above example, the Licensee's first reportable period will be 1 January 2020 to 31 December 2020 and the first Notification would be due in 2021.

Non-compliance with the obligation to file an ESR notification or any relevant information within the deadline shall attract a financial penalty. Pleas refer to Ministry of Finance website for details regarding the penalties

Providing incorrect, false, or misleading information in the ESR report form shall attract a financial penalty. Please refer to Ministry of Finance website for details regarding the penalties

ESR is a self-assessing requirement. DHCA is unable to make decisions on behalf of the licensees, as DHCA is required to validate the information submitted in ESR notification and reports by the licensees.

If you require further information or advice, please refer to the MOF website or contact professional advisors.

At the Ministry of Finance's Economic Substance Regulations page, which includes additional FAQs and other useful background information.