What You Need to Know About the New Economic Substance Regulations
In November 2019, the UAE passed Cabinet Resolution No. 31 of 2019, commonly known as the Economic Substance Regulations (“ESR”). The ESR’s objective is to define an adequate level of economic presence for all UAE-based organizations (on-shore or free zone) that carry out one or more of the listed relevant activities, as well as provide a realistic timeframe for companies to comply with the new ESR notification and reporting guidelines. The ESR was passed in response to the European Union’s blacklisting of the UAE over money laundering and tax evasion concerns.
The UAE replaced the ESR in August this year with Cabinet Resolution No. 57 of 2020 and the Ministry of Finance’s Ministerial Decision No. 100 of 2020 (“New ESR”). The New ESR contain a number of important changes to key provisions – many of which companies may have missed during a year where there was unprecedented upheaval across all markets.
Below we answer some common questions, taking the New ESR into account.
Who has to file a notification and/or report under the New ESR?
The New ESR requires a “Licensee” (a legal person established inside or outside the UAE) or partnership undertaking a “Relevant Activity” to file a notification and/or report. Individuals, sole proprietorships, trusts and foundations are not covered by the New ESR.
Additionally, under the New ESR, the following Licensees are exempt for economic substance obligations:
· Investment funds
· Companies that are a tax resident outside the UAE
· Businesses wholly owned by UAE resident(s) that are not part of a multinational group and only do business in the UAE
· A branch of a foreign entity that is subject to tax on all its relevant income in a foreign jurisdiction
· Any Licensee deemed an “Exempt Licensee” by the Ministry of Finance
However, exempt Licensees must file a notification documenting their exempt status.
What is a “Relevant Activity”?
According to the UAE Ministry of Finance, any onshore or free zone company that carries out one or more of the following relevant activities must demonstrate a sufficient and adequate “economic presence” in the UAE with respect to the activity they perform:
· Distribution and service centers
· Holding companies
· Intellectual Property (IP)
· Investment fund management
· Lease finance
The New ESR clarifies the economic substance requirements for a distribution and service center, making it applicable only to UAE entities whose main activity is distribution and/or service center operations. A UAE entity is considered a distribution business when it:
· Purchases goods from a “Foreign Connected Person”; and
· Distributes those goods
A UAE entity is considered a service center if it provides services to a Foreign Connected Person. For the purposes of the New ESR, a Foreign Connected Person is any entity that is part of the same group of companies but is not a tax resident in the UAE. Thus, UAE entities purchasing goods or providing services only to third parties would not be considered “distribution and service centers” under the New ESR.
What are the need-to-know processes and deadlines?
Under the New ESR, all notifications and reports must be filed online through the Ministry of Finance’s portal. Most importantly, entities that have already filed their notification must refile online through the portal.
The portal only became active in December 2020, and the deadline for notification submissions has been extended to 31st January 2021. Because fines can be quite significant, ranging from AED 20,000 to AED 50,000, companies should carefully evaluate their position and speak with a qualified legal consultant in Dubai for clarification.
The best way to avoid costly penalties and litigation is to work with a licensed corporate lawyer. If you need assistance with any legal matters, call MS Law at +971 4 329 8880 and talk to an experienced legal consultant in Dubai.