By Eimhéar O’Kane, Associate
In April 2019, the UAE Cabinet issued Cabinet Resolution No.31/2019 concerning Economic Substance Regulations (“ESR”) setting international standards against harmful tax practices.
In August 2020, the above-mentioned Resolution was repealed and replaced by Cabinet Resolution No.57/2020 (the “Amended Resolution”), meaning that all entities who submitted an ESR notification earlier this year, will need to re-assess & re-submit a notification by the new deadline of 31 December 2020.
Who do the ESR requirements apply to?
The Amended Resolution applies to all “Licensees”, defined as a “legal person”, whether established inside or outside of the UAE, who is licensed/registered in the UAE, including any free zone or financial free zone, who exercises a Relevant Activity.
Companies who are established outside of the UAE but who operate a branch in the UAE should consider whether the Amended Resolution applies to them & whether they should submit a notification (i.e. if they are not subject to tax in another jurisdiction).
The Amended Resolution sets out a list of “Exempted Licensees” who shall not be required to meet the Economic Substance Requirements (but who are still required to submit an annual notification sufficiently confirming its capacity as an Exempted Licensee). The list of Exempted Licensees includes:
- Investment funds;
- Entities wholly tax resident in another jurisdiction;
- Entities wholly-owned by UAE residents who are not considered part of a multi-national group of companies and who exercise their activities exclusively within the UAE; and
- Branches of foreign companies whose “income generated from the relevant activity” is taxable in any country other than the UAE.
What is required?
Every entity to whom the Amended Resolution applies must file a notification by the appropriate deadline, confirming whether they have carried on a Relevant Activity (as set out in the Amended Resolution) within the previous financial year or not. Should their investigations & notification show that they carry on any of the Relevant Activities, they must submit an ESR Report by the reporting deadline along with evidence displaying that they have fulfilled the economic substance requirements for that period.
When is the deadline?
Every entity (including Exempted Licensees) must submit an annual ESR notification, and by no later than 6 months from the end of their financial year starting from 1st January 2019 (the notification template can be found here). For the first notification deadline, the deadline is automatically extended to 31st December 2020 to ensure compliance.
Entities who are carrying on a Relevant Activity & therefore are required to display compliance with ESR must submit a report within 12 months from the end of their financial year (a template report can be found here).
Where can I submit my notification & report?
The notification must be submitted electronically on the Ministry of Finance’s portal. Those who have already submitted a notification to their licensing authorities before the previously stated deadline must re-submit a notification on the Ministry of Finance portal once available.
Why is this required?
Pursuant to global standards set on harmful tax practices; the UAE has implemented the Economic Substance Regulations to assist in ensuring that geographically mobile business activities originating in the UAE have real ‘economic substance’ in the jurisdiction. If a company determines that they have carried on a Relevant Activity during the previous financial year, they are required that they have fulfilled the Economic Substance Requirements in relation to each Relevant Activity. For the purposes of ESR, ‘Relevant Activities’ include:
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease - Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP")
- Distribution and Service Centre Business
Additional guidance is available on the specific requirements for the above-mentioned Relevant Activities. If you believe you carry on any Relevant Activity, you can contact us to discuss further.
The Amended Resolution has increased the financial penalties which may be imposed on entities who neglect to comply with the notification & filing requirements on time. For example, where Licensees or Exempted Licensees fail to submit their notifications (and any other documents requested by the authorities), an administrative fine of AED 20,000 may be imposed. A fine of AED 50,000 may be imposed on Licensees or Exempted Licensees who fail to submit their Economic Substance Report, who fail to meet the Economic Substance Test, or who submit inaccurate information to the authorities.
As a matter of immediate attention, all entities should re-assess the notification previously submitted by them & prepare to re-submit this in the form mentioned above. Once available, all entities should re-submit their notification through the Ministry of Finance portal.