Economic Substance Regulation [ESR]

UAE Economic Substance Regulations & ESR Filing in UAE

Economic Substance Regulations in the UAE is another compliance requirement for entities registered in the UAE. The United Arab Emirates (UAE) Ministry initially enacted 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. However, On 10th August 2020 New Economic Substance Regulation was introduced in the UAE via Cabinet Resolution 57/2020 which repealed and revoked Cabinet Decision no. 31/2019.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.

One of the four criteria in the framework of OECD is the absence of a requirement that the activity is substantial. In addition, the European Union is working to have Tax Governance at Global Level in order to curb Tax avoidance, evasion. 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. UAE is a “No or Only Nominal Tax Jurisdiction” (NOON’s) environment and is in line with other jurisdictions with the same environment who are parties to this framework.

Applicability of UAE Economic Substance Regulations

Economic Substance Regulation is applicable to all Licensee & Exempted Licensee carrying on the Relevant Activities in the UAE, including the Free Zone or Financial Free Zone; with effect from the year 2019.

Relevant Activities under UAE Economic Substance Regulations

• Banking Business
• Insurance Business
• Investment Fund Management Business
• Intellectual Property Business
• Lease-Finance Business
• Shipping Business
• Headquarters Business
• Holding Company Business
• Distribution & Service Centre Business

Exempt Licensee as per Cabinet Resolution 57/2020

The Scope of Exempted Licensee as per Cabinet Resolution No. 57/2020 is extended. Following entities fall in Exempted Licensee:

• An Investment fund
• A licensee that is Tax Resident in a Jurisdiction other than in the UAE
• A licensee that is wholly owned by one or more UAE Resident and meets the following conditions:
  » An entity should not be part of MNE Group
  » An entity should carry business only in the UAE
• A licensee that is the branch of a foreign entity the Relevant Income of which is subject to tax in a jurisdiction other than UAE

How to meet the Economic Substance Test?

• Check whether the entity conducts/ performs Core Income-Generating Activity (CIGA) in the State.
• Check whether the entity is directed and managed in the State in relation to that activity.
• Check whether the company employs an adequate number of qualified full-time employees or incurs an adequate level of operating expenditure and adequate physical assets in the state.
• If CIGA is conducted by another entity for the relevant licensee, then check whether the Licensee has full control and is be able to monitor the activities of another entity.

Authorities as per CRN 57/2020:

I.Functions of Authorities as per ESR

1. Regulatory Authority:

• Collect information through Notification, Substance Report and supporting documents
• Review the information obtained from Licensee & Exempted Licensee
• Undertake assessment on the determination of Exempted Licensee
• Other functions as per Article 4 of the Cabinet Resolution 57/2020

2. National Assessing Authority:

• Federal Tax Authority is hereby appointed as National Assessing Authority
• To undertake assessments to determine the Economic Substance Test
• Impose the administrative penalties
• Hear and decide on appeals
• Other functions as per Article 5 of the Cabinet Resolution 57/2020

3. Competent Authority:

• Providing information of Licensee or Exempted Licensee that has not met Substance test to Foreign Competent Authority
• Providing information in relation to high-Risk IP Business Licensee to Foreign Competent Authority
• Such other functions as per the Resolution

Why is the Assessment of Activities important?

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. The substance over form approach is to be considered in assessing the activities. It is significant to note that even Passive Income from any of the activity falling within the definition of relevant activity would require an entity to comply with the regulation. Going incorrect with the Assessment may lead to the filing of inaccurate information with the Authorities. This may further lead to penalties.

ESR Notification should be filed by all Licensee and Exempted Licensee annually providing the following details:

• Date of commencement and end of Financial Year
• Relevant Activity being carried
• Whether Revenue generated from such Relevant activity during relevant Financial year
• Other information as required by the Regulatory Authority

Exempted Licensee to also provide all the information and documents for claiming the status of Exempted Licensee.

Notification must be filed within 6months from the end of its Financial Year & ESR Report must be filed within 12months from the end of its Financial Year of the Licensee or exempted licensee. For e.g:

Financial Year-end	ESR Notification on MoF Portal	ESR Reporting on MoF Portal
Dec 2019	Extended deadline by 31st Jan 2021	Extended deadline by 31st Jan 2021
31st Mar 2020	Extended deadline by 31st Jan 2021	31st Mar 2021
30th Jun 2020	Extended deadline by 31st Jan 2021	30th Jun 2021
30th Sep 2020	Extended deadline by 31st Jan 2021	30th Sep 2021

Penalties in case of non-compliance with ESR:

Particulars	ESR Notification	ESR Reporting
Failure to submit before Due date	AED 20,000	AED 50,000
Submission of Inaccurate or incorrect information	AED 50,000	AED 50,000

The penalty in case of failure to submit the notification

An administrative Penalty amounting to AED 20,000 shall be imposed on Licensee or Exempted Licensee who has failed to submit the notification or any information or document required to be filed