There has been an amendment in the Economic Substance Regulations. Cabinet of Ministers Resolution No.31 of 2019 is now replaced by Cabinet of Ministers Resolution No.57 of 2020. This new ESR is applicable retrospectively from 1st January 2019.
There have been a number of critical changes in the law that may impact businesses in UAE and their applicability to the ESR law. Here we have listed below the key changes in the new regulations.
1.Notifications resubmissions –All licensees that have already submitted a Notification directly to their Regulatory Authorities are required to re-submit a Notification in accordance with the provisions of the ESR Regulations on the Ministry of Finance Portal once available.
2. Exempt licensees – The new regulations have clearly defined some business entities that are exempt from meeting the Economic Substance Test. They, however, have to still submit a notification along with supports to prove that they fall under the exempt license category. The exempt license includes any of the following entities that are registered in the UAE and carry out a relevant activity:
- Investment fund (different from an investment fund management business)
- Entity with a tax jurisdiction in another country and is subject to corporate tax on all of its income.
- An entity wholly owned by UAE residents (UAE citizens or individuals holding a valid UAE residency permit) and that
- (i) are not part of an MNE group, and
- (ii) business activities are only carried out in the UAE
- Branches of a foreign entity whose relevant income is subject to tax in the jurisdiction outside UAE
- Any other licensee as determined pursuant to the decision of the Ministry of finance.
There is no longer any mention of the Federal Government of the UAE or the Government of any Emirate of the UAE, or any governmental authority or body or any of them has at least 51% direct or indirect ownership in their share capital, to be exempt from ESR.
3. Connected persons – Now the law defines a connected person as a licensee or exempted licensee that falls under the same group.
4. Group – It is defined as two or more entities related through ownership or control such that as per the applicable accounting standards they are required to prepare consolidated financial statements.
5. MNE group – This means any group where:
- 2 or more entities that have a tax residence in 2 different jurisdictions, or
- An entity that is resident for tax purposes in one jurisdiction but has a branch or a permanent establishment that carries out activities and is subject to tax in another jurisdiction.
6. Branches- The new law has brought some more clarity on branches. Branches are treated as the same legal entity as its parent or head office. What this basically means is that:
- UAE branch of a UAE company – should submit only one ESR notification and / or ESR report along with its parent or head office
- UAE branch of a foreign company – Does not report for ESR as long as relevant income is subject to tax in the jurisdiction outside UAE, and thus will be treated as an exempted license.
7. Licensee- as per the current law a licensee can be any of the 2 following entities registered in the state (including free zones and financial free zones):
- A juridical person
- Unincorporated partnerships
Natural persons, sole proprietors, trusts and foundations are no longer considered licensees.
8. Distribution & Service center business – The new definition of this means center that does either of the following:
- purchasing from a Foreign Connected Person component parts or materials for goods; or goods ready for sale, and reselling such component parts, materials or goods; or
- providing services to Foreign Connected Persons.
So, what this basically means is that it is no longer necessary for a business to be conducting a distribution business to be importing materials to UAE, i.e. third port shipments will all come in the ambit of the law. Also, for a service centre business it is no longer necessary for the foreign connected person to conduct business outside the UAE.
9. High-risk IP – The narrow definition of high-risk IP business has also slightly altered. Now it is defined as a Licensee which carries on an Intellectual Property Business and the Licensee:
- did not create the intellectual property in an Intellectual Property Asset which it holds for the purposes of its business;
- acquired the Intellectual Property Asset either from –
- a Connected Person; or
- in consideration for funding research and development by another person situated in a country other than the State and,
- licenses or has sold the Intellectual Property Asset to one or more Connected Persons, or otherwise earns separately identifiable income from a Foreign Connected Person in respect of the use or exploitation of the Intellectual Property Asset.
10. National Assessing Authority – FTA is appointed as the national accessing authority and has the following responsibilities :
- undertake assessments to determine whether a Licensee or an Exempted Licensee has met the Economic Substance Test
- impose the administrative penalties
- hear and decide on appeals pursuant to Article 17 of this Resolution;
- carry out the reporting requirements
- exercise any other powers or functions as required to implement the Cabinet of Ministers Resolution No.57 of 2020; and
- exercise any other powers or functions as may be required to implement any decision of the Competent Authority or the Minister of Finance issued pursuant to the Cabinet of Ministers Resolution No.57 of 2020.
11. Directed and managed in UAE – To meet this part of the economic substance test the management, the board, or any equivalent must be present in the UAE when taking the decisions, they are not required to be residents of the UAE.
12. Outsourcing activities other than CIGA- Licensees can outsource activities like, back office, IT, legal, or other specialist services that are not CIGA’s to outside UAE.