Amendments in UAE's ESR Law

Background

As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Original Regulations”) on 30 April 2019. Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities  tasked with the administration and enforcement of the Regulations.

Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020 (“Amended Regulation”), and updated Guidance was issued on 19 August 2020 Ministerial Decision No. (100) of 2020. This Amended Regulation repealed the Original Regulation

Crtical Amendments and Annoucements in Amended Regulation

1. Change in Defination of "Licensee":

Licensee is an entity that is:

1. a juridical person (incorporated inside or outside the State); or
2. an Unincorporated Partnership;

registered in the State, including a Free Zone and a Financial Free Zone and carries on a Relevant Activity

Natural persons, sole proprietors, trusts and foundations (that were considered as “Licensees” under the original ES Regulations) are no longer in scope of the ES regulations, and therefore do not need to file a notification or meet the Economic Substance Test

2. Introduction of "Exempted Licensee": 

The amended ES Regulations introduce the following exemptions:

1. A Licensee that is tax resident outside the UAE;
2. An Investment fund and its underlying SPVs / investment holding entities;
3. A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE
4. A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction

Exempt entities must (i) file a notification and (ii) provide sufficient documentary evidence to substantiate and benefit from their exempt status.

Entities directly or indirectly owned at least 51% by the UAE government are no longer specifically exempted under the amended ES Regulations. Such entities may (where applicable) need to comply ESR.

3. The Defination of "Connected Person" made more clear:

The amended ES Regulations define a Connected Person as an entity that is a part of the same Group as the Licensee or the Exempted Licensee

A Group is defined as “two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable thereto 

More clarity in regards to Connected person given by law

4. Appointment of National Assessing Authority:

The Federal Tax Authority is appointed as National Assessing Authority 

In this capacity, the FTA will be responsible for assessing and enforcing compliance of UAE businesses with the Economic Substance Test.

Very Important descion in the Ministerial Descion (100) as FTA is already a Regulatory authority for VAT in UAE and has access of most the information. Expecting Data share and reconciliation of ESR and VAT.

5. Timeline for Notification Filing Announced:

All the Licensee and Exempted Licensee needs to Electronically Submit the ES Notification within Six Months from the end of Financial Year

Removed Ambigities by defining same timeline for all licensee. But all the Licensee who have filed ES Notification needs to re-submit the same electronically on the MOF Portal once live.

6. Clarification on Applicability on Branches:

It is clarified that branches do not have separate legal personalities from their “parent” or “head office”, they are not regarded as “Licensees”

As such, the “parent” or “head office” registered in the UAE must file as a single Licensee, reporting the Relevant Activities of itself and all its branches in one composite Notification and / or Economic Substance Report

UAE Branches of Foreign Entity is exempted for ESR if its Relevant Income is Taxed in Foreign Jurisdiction

Foreign Branches of UAE Buisiness not in scope of ESR if the Relevant income of that Branch is Taxed in Foreign Jurisdiction.

Welcome move and much needed clarification for the UAE entities having multiple branches spread across emirates

7. Inclusion of "Financial Statement" in ES Report

Authority has added new requirement to share the Financial Statement in ES Report

It is very crucial and important requirement for UAE Businesses which are required to file ES Report. The Financials are required for each licensee and not as group.

8. Change in Defination of "Distribution and Service Centre Business"

As per Amended regulations, Licensee is considered engaged in a “Distribution Business” if it:

• Purchases raw materials or finished products from a foreign group company; and
• Distributes those raw materials or finished goods

A Licensee is considered engaged in a “Service Centre Business” if it provides consulting, administrative or other services to a foreign group company

In Distribution Business the requirement for the Goods to be "imported and Stored" in UAE is removed. 

In “Service Centre Business” there is no longer a requirement for services to be provided “in connection with a business outside the State”. Thus any service provided to Foreign Related party will be considered as Service Centre Business

9. Change in condition for "High Risk IP Licensee"

The Amended ES Regulation has limited the High Risk IP Licenses that meet all the below condition:

1. The Licensee did not create the Intellectual Property Asset which it holds for the purpose of its business, and
2. The Licensee acquired the IP Asset from either
   1. A Connected Person; or
   2. In consideration for funding research and development by another person situated in a foreign jurisdiction; and
3. The Licensee licenses or has sold the IP Asset to one or more group companies, or otherwise earns separately identifiable gross income (e.g. royalties, licence fees) from a foreign group company in respect of the use or exploitation of the IP asset.

The (b) condition of Old regulation "the Licensee does not carry out research and development, or branding, marketing and distribution as part of its State Core Income-Generating Activity" is removed.

10. Revision of Penalties and Offenses

The Penalties have been revised upwards. Now Penalty ranges from AED 20,000 to AED 400,000 which was earlier limited to AED 300,000 Maximum.

Business needs to more compliant and it demonstrates the resolve of Authorites to ensure due implementation of the Regulation

Key Takeaways from the Amendment

• The provision have been made more definitive and reduced scope of errors in interpretation
• The Buisness must need to re-asses and re-evaluate the postions taken and take corrective measures. The Entity assessment should involve sufficient consideration of the Local federal laws, Tax laws, transfer pricing and other international laws, DTAA Agreements, Internal Controls and its implementation, SOPs, internal policies and its practice
• Licensee needs to resubmit the ES Notification thus opportunity to rectify the errors if any made in old Notification
• Sufficient importance is given of the documentation kept by the entity like evidence needs to be submitted to prove the exemption which may include Tax details, return filed, etc