By Vida Grace and Suneer Kumar/members of the corporate and commercial practice group at Al Suwaidi & Company
The purpose of the Regulations is to ensure that UAE entities that undertake certain activities are not used to artificially attract profits that are not commensurate with the economic activity undertaken in the UAE.
The rules of Economic Substance Regulations are broadly similar to the regulations introduced by other countries with similar tax environment (i.e. no or only nominal tax), as they follow the guidance issued and the global standard developed by the European Union (EU) and OECD.
REQUIREMENT FOR ECONOMIC SUBSTANCE TEST
For each financial period in which a Licensee earns income from a Relevant Activity, it will need to meet an Economic Substance Test in relation to that activity. In addition to an annual notification requirement, Licensees that undertake and earn income from a Relevant Activity are also required to file an Economic Substance Return within 12 months from the end of the relevant financial period.
The Economic Substance Test requires a Licensee to demonstrate the following tests:
- Direction and Management Test
“Licensee is directed and managed in the UAE in relation to that Relevant Activity” (Article 6 (2) (b) of the Regulations)
- Core Income Generating Activities (CIGA) Test
That the core income-generating activities of the Relevant Activity are being conducted in the UAE.
- Adequacy Test – the License has the following:
- Adequate employees – pertaining to a number of qualified full -time employees who are physically present in the UAE. If outsourced, then adequate level of expenditure on outsourcing to a third party. Employee can either be employed by the Licensee, third party, or via temporary contract.
- Adequate level of operating expenditure incurred by the Licensee in the UAE
- Adequate physical assets in the UAE
FIRST REPORTABLE FINANCIAL YEAR
The first assessable period for a UAE company with 1 January 2019 – 31 December 2019 financial year, would be 1 January 2019 – 31 December 2019.
The first assessable period for a UAE company with 1 April 2019 – 31 March 2020 financial year, would be 1 April 2019 – 31 March 2020.
There is no need to comply with the Regulations for the period 1 January 2019 – 31 March 2019.
SCOPE OF THE REGULATIONS
The scope of the Regulations requires that where the “Licensee earns income from a Relevant Activity, they must have Economic Substance in UAE and they need to satisfy Economic Substance Test, notify and report to relevant authority”.
The provisions of this Resolution shall not apply to any commercial company which is the Government of the State, or the Government of any Emirate of the State, or any governmental authority or body of any of them has any direct or indirect ownership in its share capital.
WHAT RELEVANT ACTIVITIES ARE CAUGHT BY THE LEGISLATION?
Relevant Activity are the following: the below listing is not exhaustive and that the list “includes the activities listed but is not limited to them.” Article 5 of the Regulations further states that the below “are regarded to be the most important activities that a Licensee carrying out a Relevant Activity is expected to be carrying on in the UAE.”
|Relevant Activity||Core Income Generating Activity as Per Regulations|
|1. Banking Business
|· raising funds, managing risk including credit, currency and interest risk;
· taking hedging positions
· providing loans, credit or other financial services to customers
· managing capital and preparing reports or returns, or both, to investors or any government authority with functions relating to the supervision or regulation of such business
|2. Insurance Business||·predicting and calculating risk
· insuring or re-insuring against risk and providing Insurance Business services to clients
· underwriting insurance and reinsurance
|3. Investment Fund Management Business||· taking decisions on the holding and selling of investments
· calculating risk and reserves
· taking decisions on currency or interest fluctuations and hedging positions
· preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business
|4. Lease-Finance Business||· agreeing funding terms
· identifying and acquiring assets to be leased (in the case of leasing)
· setting the terms and duration of any financing or leasing
· monitoring and revising any agreements
· managing any risks
|5. Headquarters Business||· services to foreign group companies, and through the provision of such services and any company in the Group can be considered as doing Headquarter business
· related to (i) taking relevant management decisions; (ii) incurring expenditures on behalf of other entities in the Group (iii) coordinating activities of the Group
|6. Shipping Business||· managing crew (including hiring, paying and overseeing crew members)
· overhauling and maintaining ships
· overseeing and tracking shipping
· determining what goods to order and when to deliver them, organising and overseeing voyages.
|7. Holding Company Business||· business of primary function the acquisition and holding of shares or equitable interests in other companies
· derives income from other sources other than dividends and capital gains from its equity
|8. Intellectual Property Business||· where the Intellectual Property Asset is:
– patent or an asset that is similar to a patent, research and development.
– non-trade intangible (including a trademark), branding, marketing and distribution.
· if the Relevant Activity is conducted by a Licensee that is regarded as a High Risk IP Licensee, the State Core Income-Generating Activity must include any of the following additional activities:
– taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income
– taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset
– carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties
|9. Distribution and Service Centre Business||· Distribution Business Centre – if the Licensee purchases raw materials or finished products from a foreign group company, and distributes those raw materials or finished goods
· Service Centre Business – providing consulting, administrative or other services to a foreign group company, and those services are in connection with the foreign group company’s business outside the UAE.
WHO IS LICENSEE?
Licensee is defined as a natural, or juridical person licensed by the competent licensing authority/authorities in the State, to carry out a relevant activity in the State. This includes free zones and financial free zones.
|JURISDICTION||WHO ARE REQUIRED TO NOTIFY||FILING PROCEDURE||DEADLINES|
|Dubai Airport Free Zone||All Licensees including those who qualify for exemption are required to notify||DAFZ Portal||03-Jun-20|
|Dubai International Financial Centre (DIFC)||All Licensees including those who qualify for exemption are required to notify||DIFC Portal||12-Jun-20|
|Dubai Multi Commodity Centre (DMCC)||All Licensees including those who qualify for exemption are required to notify||DMCC Portal||30-Jun-20|
|Dubai World Trade Centre||Entities that are carrying out Relevant Activitiesemail@example.com||30-Jun-20|
|Dubai Aviation Corporation||All Licensees including those who qualify for exemption are required to firstname.lastname@example.org||07-Jun-20|
|Abu Dhabi Global Market (ADGM)||Entities that are carrying out Relevant Activitiesemail@example.com||30-Jun-20|
|RAKICC||All Licensees including those who qualify for exemption are required to notify||RAKICC Portal by Registered Agents Only||30-Jun-20|
|RAKEZ||All Licensees including those who qualify for exemption are required to notify||RAKEZ Portal||30-Jun-20|
|Ajman Free Zone||All Licensees including those who qualify for exemption are required to firstname.lastname@example.org||30-Jun-20|
|Dubai Silicon Oasis||All Licensees including those who qualify for exemption are required to notify||Lic_section@dso.ae||31-May-20|
|Economic Department of Economic Development (DED) of each Emirates*||Every Mainland company of UAE (including branches of local and multinational companies) is required to submit the notification required under Cabinet Decision 31 of 2019 concerning Economic Substance Regulations (‘ESR’), on or before June 30, 2020 to the Ministry of Economy (‘MoE’) of UAE. Free Zone and Offshore companies (including branches) are required to follow the timeline issued by the respective Regulatory Authority.
All companies (Mainland, Free Zone and Offshore companies) who are conducting Relevant Activities are required to submit the ESR Report to MoE on or before December 31, 2020. Reporting requirement is not applicable on companies owned at least 51% by Federal or local Government, Government company or any Body of them.
|Ministry of Economy||30-Jun-20|
SOME FREQUENTLY ASKED QUESTIONS
1. Is an “offshore” free zone subject to the Regulations?
Yes, if the ‘offshore’ company undertakes a Relevant Activity.
2. Who is exempt from the Regulations?
Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE Government body or authority, are exempt from the Regulations.
3. Is the Licensee exempt from the Regulations if all its income derived from the Relevant Activity is earned outside of UAE?
No, this Licensee is not exempt from the Regulations. Income from a Relevant Activity for which the Licensee needs to demonstrate economic substance in the UAE includes all income, including income that is generated by the Licensee outside of the UAE.
HOW CAN WE HELP?
We are currently assisting, supporting, and advising businesses in assessing their business activities in relation to ESR compliance and support preparation of any reports or notifications that may be required by respective authorities.
If you wish to receive our PDF guide on ESR or wish any further assistance on this or any other matter, please contact, our authors Vida Grace on email@example.com or Suneer Kumar firstname.lastname@example.org +971(0)505248454