Economic Substance Regulation (ESR) Application

Overview

Economic Substance Regulation (ESR) has been introduced by, Organization for Economic Cooperation and Development (OECD) with the following motive and principles:

• In making the effort to set the global standard that requires companies to have substantial activities in a jurisdiction.
• To establish a belief that the companies are carrying out the actual economic activity in the Statethat achieve economic substance interest.
• To comply with international initiatives to combat harmful tax practices.
• To address various reputational concerns e.g., in respect of transparency, which the jurisdiction has been subject to from international players and investors alike.
• The basis to support that the incorporation was not driven solely to benefit from the privileged tax regime.
• To ensure that activities are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the State.
• To show that sufficient economic substance exists within the "no or only nominal tax (noon)” jurisdictions.

In compliance and conformance with the above elements and to make abreast with the principles, countries has adopted OECD Base Erosion and Profit Shifting (BEPS) minimum standards. Likewise, GCC membershas also shown some dignity by taking an initiative to implement thestandards.

In lieu to that, GCC members likeBahrain and UAE has taken multiple initiates by introducing resolution on Economic Substance. The key element of the resolution isto ensure that the Core Income Generating Activities (“CIGAs”) are undertaken in the State.

Scope of Resolution

The Resolution applies to all UAE onshore and free zone companies (including branches and representative offices) which undertake the "Relevant Activities" like: Banking, Insurance, Investment fund management, Lease-finance, Headquarters, Shipping, Holding companies, Intellectual property, andDistribution and service centers.

The Resolution expressly excludes any entities which are directly or indirectly owned by the UAE government (both federal and local), or any governmental authority or body.

Notification and Return Deadlines

• As per the UAE government guidelines it was notified that the entities who is performing ‘Relevant Activity’ shall be submitting a simple notification for which the format by the regulatory authority shall be furnished.
• The deadline for notification was initially set for 31st Dec 2019, but then it was reconsidered and extended by the regulators.
• For ESR Return filing the regulatory requirement states that it should not filed no later than 12 months after the after the last day of the end of each financial year.

The below chart depicts the important dates and deadlines with respect to ESR:

Compliance, Implication and Potential Challenges

Compliance is a key in terms of notification and submission of ESR returns. An entity carrying out Relevant Activities (the “Relevant Entity”) must:

• comply with the economic substance test (“Economic Substance Test”), and
• provide the requisite information to the Regulatory Authority under the Regulations.

For compliance it is very important to fulfil the Economic Substance requirements or there might be penalties up to AED 300K from the regulators as per the regulatory guidelines which may come.

Hence, we are recommending our client:

• For the understanding on the applicability,there should be a process where entities can understand whether the relevant activities are performed by them and core income generating activities perform by them in UAE or not.

In this regard we are providing our client an ‘ESR Applicationtool’ for free.

Please refer link below:

http://ajmslobal.com/esr-tool/

• For identifying the impact and compliance with the ESR return filing, there should be a process where entities can perform the ERS tests, get the impact due toeconomic substancerequirement and cangenerate the return as per the regulatory requirement.

In this regard we are providing our client an ‘Impact and Return Filing Tool’.

Application Tool is a basic version toolto be run as a phase 1 approach (first step) which require certain inputs from the entities on its incorporation, jurisdiction, license type and activities, financial year etc. to generate the ESR applicability result as well as

Impact Assessment / Return Filing Tool is an advanced version tool to be run as a phase 2 approach (final step) andwill only be applicable if application requirement from phase 1 found to be positive.The tool will facilitate entities to undertake economic substance test for which necessary information’s and conditions are set to be required from the entity. The testing requirements has ultimately to ensure:

1. Adequate employees, physical assets & expenditure in the UAE,
2. Core Income Generating Activities (“CIGAs”) are undertaken in the UAE,
3. Directed and managed in the UAE.

Once the entities through with the information and requirements, then:

• The results on the conformanceor non-conformance of ESR will be produced,
• ESR impact will be generated, and
• ESR return filing engine will be activated toauto populate the results in the pre-defined return filing format.

SOURCES: UAE – MOF, OECD, CABINET OF MINISTERS RESOLUTION # 31 of 2019

About Us

AJMS Global Consulting is a niche consulting firm comprising of Finance Sector professionals (like Banks, Insurance, Exchange House), Ex-CBUAE professionals, Chartered Accountants and Management Consultants based in the UAE with offices across GCC countries.

AJMS offer professional advisory services including Internal Audit, Tax, Risk, Compliance and IFRS implementation solutions to BFSI sector companies.

Disclaimer: Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/ interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/ post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.