Economic Substance Regulations Update
Economic Substance Regulations (ESR), were first introduced in the United Arab Emirates (UAE) in April 2019, and subsequently updated in 4Q2020, which repeals and replaces the original ESR. New guidelines have been issued and all applicable entities in the UAE are now subject to the guidance of the amended and updated ESR.
Chiefly, the Ministry of Finance has unveiled its portal
, requiring all eligible entities to now re-file and re-submit their notifications through it. In June 2020, there was a flurry of activity for UAE-incorporated companies to file their ESR notifications, as the then applicable regulations specified a deadline of 30 June 2020. However, with the updated Regulations and dedicated new portal, all applicable UAE entities are now required to submit their notifications by 31 December 2020
This means that everything you likely would have completed in June 2020 has been invalidated, and you are now required to re-file, re-submit new forms, under a slightly revised scope, to a new designated authority.
What is New?
The updated ESR overrides the previous guidelines, thus requiring all UAE entities to re-assess their eligibility and compatibility of previous filings with the current regulation.
UAE entities under the scope of the revised regulation will need to submit (or in some cases, re-submit) their notifications.
Licensees are also re-defined to apply to mean juridical persons and unincorporated partnerships that engage in any one of the Relevant Activity(ies). Natural persons, sole proprietors, trust and foundations (previously categorized as Licensees) are now no longer considered as such.
Foreign and local branches of UAE companies, as well as UAE-registered branches of foreign companies have updated guidelines and classification under the amended ESR. Companies incorporated outside of the UAE, that conducts a Relevant Activity(ies) in the UAE through a UAE-registered branch do not need to demonstrate economic substance, provided that the relevant income earned through the branch is subject to tax in the originating jurisdiction; whereas entities registered in the UAE that conducts a Relevant Activity(ies) through foreign branches outside of the UAE, which are subjected to taxation in that jurisdiction, do not need to report economic substance.
Exemptions have also been clarified, namely for the below entities:
a. Investment funds;
b. Entities that have a tax residency outside of the UAE;
c. Entities wholly owned by UAE residents and or nationals, and which are not part of a multi-national corporation and only conducts its business activities in the UAE; and
d. Branches of foreign companies that are tax residents of another jurisdiction (see above branch categorization).
e. Any licensee that has been granted exemption by the Minister of Finance
It is worth noting that exemptions for economic substance do not mean an exemption from the filing of the notification, especially when the activity is considered one of the Relevant Activity(ies).
The ESR tests, and the definitions of the core income generating activities (CIGAs) remain, for the most part, the same; except for certain minor clarifications.
Penalties have been increased, it is now a penalty of AED 50,000 for failure to submit the report(s) or failure to meet the requirements of the test(s) in the first year; and AED 400,000 for persisted failure in the second year. For providing inaccurate information to the authorities, a penalty of AED 50,000 will be imposed on the offending party; and AED 20,000 for failure to submit a notification.
What can you Expect?
If you have filed for ESR Notifications prior to December 2020, you are now required to re-file everything on the designated Ministry of Finance portal.
If you have filed for ESR Notifications prior to December 2020, you are now also required to re-evaluate your circumstances against the revised rulings, and determine the scope, if any, has changed significantly for you.
If you are an existing client of Freemont Oneworld Group, you can expect an email notification from your designated account managers latest by 17 December 2020, regarding all applicable initial steps to be undertaken to ensure compliance with the revised ESR rulings.