On 30 April 2019, the UAE introduced the Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the "ESR"). On 10 August 2020, amendments were introduced to Resolution 31 by the Cabinet of Ministers by way of Cabinet of Ministers Resolution No. 57 of 2020, which repealed and replaced Cabinet of Ministers Resolution No. 31 of 2019.
This was done as a part of UAE's commitment as a member of the OECD Inclusive Framework to implement the action points of OECD base erosion and profit shifting framework for countries across the globe with low or no corporate taxes where harmful tax practices such as tax avoidance and evasion are prevalent. UAE's move to implement ESR also came in response to an assessment of the UAE's tax framework by the European Union (EU) Code of Conduct Group on Business Taxation.
The objective of this new regulation is to ensure that all legal entities in UAE have genuine substance in the region and are reporting actual profits generated from activities conducted in the region.
The ESR applies to Licensees (i.e. legal persons and unincorporated partnerships registered by a competent authority in the UAE and that carries out a "Relevant Activity") across the UAE, including Free Zones and Financial Free Zones, and requires Licensees that carry on a Relevant Activity and derive income from such Relevant Activity to meet the Economic Substance Test (as defined in the ESR).
The Federal Economic Substance Regime consists of:
Relevant Activities are defined in the ESR as:
|Financial Year End||Notification filing deadline||ES Report filing deadline|
|31 Mar 2020 ★||31 Jan 2021 (extended deadline)||31 Mar 2021 ★|
|30 Apr 2020||31 Jan 2021 (extended deadline)||30 Apr 2021|
|31 May 2020||31 Jan 2021 (extended deadline)||31 May 2021|
|30 Jun 2020||31 Jan 2021 (extended deadline)||30 Jun 2021|
|31 Jul 2020||31 Jan 2021||31 Jul 2021|
|31 Aug 2020||28 Feb 2020||31 Aug 2021|
|30 Sep 2020 ★||31 Mar 2021 ★||30 Sep 2021|
|31 Oct 2020||30 Apr 2021||31 Oct 2021|
|30 Nov 2020||31 May 2021||30 Nov 2021|
|31 Dec 2020||30 Jun 2021||31 Dec 2021|
|31 Jan 2021||31 Jul 2021||31 Jan 2022|
|28 Feb 2021||31 Aug 2021||28 Feb 2022|
|31 Mar 2021||30 Sep 2021||31 Mar 2022|
|30 Apr 2021||31 Oct 2021||30 Apr 2022|
|31 May 2021||30 Nov 2021||31 May 2022|
|30 Jun 2021||31 Dec 2021||31 Jul 2022|
All DHCA Licensees and Exempted Licensees (i.e. persons that carry on one more "Relevant Activities") are required to notify the Registration Authority of the following annually (regardless of being exempt or not earning income), i.e. the "Annual Notification Requirement"
A notification submitted by an Exempted Licensee must be accompanied by sufficient evidence to substantiate the Exempted Licensee's status for each category in which it claims to be exempt.
The notification must be submitted within six months from the end of the Financial Year of the Licensee or Exempted Licensee.
The notification must be submitted electronically on the Ministry of Finance Portal (a link to the Portal will be provided in due course).
DHCA Licensees (not Exempted Licensees) that undertake a Relevant Activity from which they earn income during a Relevant Financial Year, are required to:
The Economic Substance Report is due within 12 months of the end of the Licensees' Relevant Financial Year (Accounting Reference Period).
Note: Exempted Licensees or Licensees that carry on a Relevant Activity but did NOT derive income from that activity during a Relevant Financial Year, do NOT need to file an Economic Substance Report for that Relevant Financial Year (however a Notification is still required).
The report must be submitted electronically on the Ministry of Finance Portal (a link to the Portal will be provided in due course).
The UAE introduced Economic Substance Regulation (ESR) on 30 April 2019 through a Cabinet of Ministers Resolution No. 31 of 2019.
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:
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:
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:
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:
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:
The matters to be considered for each of these scenarios is listed below:
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.
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