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UAE Economic Substance Regulations Consultant| ESR filing UAE.

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September 9, 2022 |

23 mins read

UAE Economic Substance Regulation

UAE Cabinet introduced the UAE Economic Substance Regulations on 30 April 2019 which was  with Cabinet Resolution No. 57 of 2020 on 10 August 2020

The Economic Substance Regulations are applicable retroactively from 01 January 2019. The Economic Substance Regulations in UAE is applicable to UAE mainland companies,  UAE free zone companies and other UAE business forms that carry out any of the following ‘Relevant Activities’ : –

Banking Business Shipping Business
Insurance Business Holding Company Business
Investment Fund Management Business Intellectual property Business (“IP“)
Lease – Finance Business Distribution and Service Centre Business
Headquarters Business

Business undertaking   any of the Relevant Activities are required under the UAE Economic Substance Regulations  : –

  • To file an Annual Notification with the relevant authority within 6 months from the end of the financial year. Entities which are carrying out a relevant activity , but which are specifically exempt under UAE Economic Substance Regulations, are also required to file Annual Notification.
  • File an Economic Substance Regulations Report  within 12 months from the end of the FY  . Entities, which are specifically exempt under  Economic Substance Regulations in UAE or entities which do not earn any income, from carrying out  the relevant activity   are not required to file the economic substance report .

ESR Notification and Penalties in case of Non-Compliance

Particulars Financial Penalties
Non filing Notification by due date AED 20,000
Non filing Economic Substance Report before Due date AED 50,000
Not meeting the Economic Substance Test First year – AED 50,000 Subsequently – AED 400,000
Failure to provide any information or providing inaccurate information AED 50,000

AED 400,000

Note – Regulatory authority may also impose suspension, revocation, or non-renewal of the license of a licensee in case of repeated non-compliance.

UAE ESR Service

FAQs related to UAE Economic Substance Notifications | ESR Reporting UAE

1. Who all are the Person covered under the UAE Economic Substance Regulations ?

Only Licensees and Exempt Licensees that undertake a Relevant Activity (irrespective of whether the Licensee or exempt Licensee has earned income from the Relevant Activity during the financial period) with a financial year commencing on or after 1 January 2019 and ending on or before 31 December XXXX are required to submit an ES Notification by not later than six months after the last day of the end of each FY. For definition of License and Exempt Licensee, please see  FAQ 2 and FAQ 3 .

2. Who is a Licensee under the UAE Economic Substance Regulations?

Article (1) of the ESR Regulations defines a Licensee as:

“An entity that is:

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

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

By way of example, a Licensee can be:

  • A limited liability company
  • A private shareholding company
  • A public shareholding company
  • A joint venture company
  • An Offshore company
  • A partnership (e.g., a limited liability partnership, a limited partnership, a general partnership, etc.)

The following persons are not considered as “Licensees” , and hence are not  required to comply with the ESR  Regulations :

  • A natural person
  • A sole proprietorship
  • A Trust
  • A Foundation

UAE ESR Service

3. Who is an exempt Licensee as per Economic Substance regulations in the UAE?

The following Licensees are considered as exempt licensee.

Where a person is an exempt licensee, they are   not required to : –

  • File ESR Notification,
  • Exempt from filing an UAE Economic Substance Report ; and
  • Not required to demonstrate substance in the UAE .

Tax resident outside the UAE

A Licensee that is a tax resident outside the UAE, is considered as exempt licensee,  and is therefore not required to file ESR Notification . For example, a foreign company, not having any business in the UAE

An investment fund

An investment fund and its underlying SPVs / investment holding entities are considered as exempt licensee .

UAE resident-owned business which is not a part of Multinational Group

A wholly UAE resident-owned business , shall be considered as an exempt licensee, provided : –

  • It is not part of a multinational group ; and
  • It only carries on business in the UAE.

For this purpose, “ A Licensee is considered to be a part of a multinational group if it has a foreign parent company or a foreign subsidiary or sister company, or if the Licensee or any other UAE entity that is under common ownership or control is subject to tax with respect to the activities carried out through a branch or permanent establishment in another jurisdiction.”

UAE branch of a foreign entity

A UAE branch of a foreign entity that is subject to tax on all its UAE Relevant Income in a foreign jurisdiction is considered as an exempt Licensee. In order to claim exemption, sufficient evidence ( must be submitted along with the Notification   to claim any of the above exemptions.

            List of documents required to claim exemption under UAE ES Regulations.

  • Letter or certificate issued by the competent authority of the foreign jurisdiction in which the entity claims to be a tax resident stating that the entity is considered to be resident for corporate income tax purposes in that jurisdiction; or
  • An assessment of corporate income tax on the entity, a corporate income tax demand, evidence of payment of corporate income tax, or any other document, issued by the competent authority of the foreign jurisdiction in which the entity claims to be a tax resident.

4. What do you mean by Relevant Activities under ES Regulations (UAE)? 

The Regulations of filing of ESR Notification apply to Licensees that carry out any of the following Relevant Activities.

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management Businesses
  • Lease-Finance Businesses
  • Headquarter Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service center Businesses

 

  • What is Banking Business as per UAE ES Regulations?

“Banking Business” means the business of accepting deposits of money which may be withdrawn, or that are repayable on demand or after a fixed period, or after notice, by cheque or otherwise, and the use of such deposits, either in whole or in part, in:

  • the making or giving of loans, advances, overdrafts, guarantees or similar facilities; or
  • the making of investments,

for the account and at the risk of the Licensee

Entities that carry out the above-mentioned entities are required to file ES Notification.

  • What is Insurance Business as per UAE ES Regulations?

Insurance Business means the business of accepting risks by effecting or carrying out contracts of insurance, in both the life and non-life sectors, including contracts of reinsurance and captive insurance arrangements.

A UAE business that carries on an Insurance Business would be regulated by either the UAE Securities & Commodities Authority (for a Licensee established ‘onshore’), the DFSA (for a Licensee established in the DIFC), or the FSRA (for a Licensee established in ADGM).

To prevent duplicate reporting, Licensees providing captive insurance services are not also considered engaged in a Distribution and Service Centre Business.

Entities that carry out the above-mentioned entities are required to file ES Notification.

  • What is Investment Fund Management Business as per UAE ES Regulations?

A UAE entity that provides discretionary investment management services to Investment Funds located in the UAE or in a different jurisdiction. An Investment Fund Management Business includes making discretionary investment, divestment, and risk related decisions on behalf of an investment fund. UAE entities providing other types of investment fund related services such as fund administration, investment advisory and custodian services are not considered engaged in an Investment Fund Management Business. The Investment Fund itself is not considered an Investment Fund Management Business unless it is a self-managed fund (the Investment Manager and the Investment Fund are part of the same entity).

UAE ESR Service

Entities that carry out the above-mentioned entities are required to file ES Notification.

  • What is Lease-Finance Business as per UAE ES Regulations?

A UAE entity is considered engaged in a Lease-Finance Business if it offers credit or financing for any kind of consideration. Providing credit includes making loans and entering other financing arrangements such as hire purchase agreements and finance leases. Licensees engaged in Banking, Insurance, and Fund Management Business may also perform lease or financing activities as a normal part of their business operations. To prevent duplicate reporting, such Licensees are not also considered engaged in a Lease-Finance Business and will not need to separately demonstrate economic substance in respect of any ancillary Lease-Finance activities.

Entities that carry out the above-mentioned entities are required to file ES Notification.

  • What is Headquarter Businesses as per UAE ES Regulations?

A UAE entity that provides services to other foreign group entities, and through the provision of such services:

  • has taken on the responsibility for the overall success of the group; or
  • is responsible for an important aspect of the group’s performance.

    Entities that carry out the above-mentioned entities are required to file ES Notification.

  • What is Shipping Businesses as per UAE ES Regulations?

To undertake a Shipping Business, a Licensee must operate one or more ships in international traffic, for the transport of either passengers, cargo, or both.

The definition of a “ship” for purposes of the ESR Regulations does not include:

  • vessels used for fishing.
  • vessels that are “small” (i.e., tonnage does not exceed ten tonnes); and
  • leisure vessels (e.g., cruise ships and private yachts).

Further, the following activities will be considered a Shipping Business only where they are undertaken by a Licensee in connection with the business of operating a ship, or ships, in international traffic:

  • the rental on a charter basis of ships
  • the sale of tickets or similar documents
  • the use, maintenance, or rental of containers
  • the management of the crew of ships.

Entities that carry out the above-mentioned entities are required to file ES Notification.

  • What is Holding Company Business as per UAE ES Regulations?

A UAE entity is considered engaged in a Holding Company Business if it:

  • Only holds equity interest(s) in juridical person(s); and
  • Only earns dividend and capital gains from its equity interest(s)

A UAE entity that holds other assets or earns other forms of income will not be considered a Holding Company Business. Where the holding of such other assets or the performance of other commercial activities constitute a different “Relevant Activity” (e.g., a Lease-Finance Business), the UAE entity would be subject to the Regulations in respect of that other Relevant Activity.

Entities that carry out the above-mentioned entities are required to file ES Notification.

  • What is Intellectual Property Businesses as per UAE ES Regulations?

A UAE business is regarded as carrying on an Intellectual Property Business if it holds, exploits, or receives gross income from “Intellectual Property Assets”.

An “Intellectual Property Asset” is defined as any intellectual property right in intangible assets, such as copyrights, patents, trademarks, brands, and technical know-how, from which the Licensee earns separately identifiable income in the form of royalties, license fees, franchise fees, capital gains and any other income from the sale or exploitation of the Intellectual Property Asset.

Entities that carry out the above-mentioned entities are required to file ES Notification.

  • What is Distribution and Service center Businesses as per UAE ES Regulations?

Distribution and Service Centre” Business refers to two distinct activities that are covered under one “Relevant Activity” heading. A UAE entity is considered engaged in a Distribution Business if it:

  • Purchases goods from a Foreign Connected Person; and
  • Distributes those goods

A UAE entity is considered engaged in a Service Centre Business if it:

  • Provides services to a Foreign Connected Person

The economic substance requirements for a Distribution and Service Centre Business are applicable to UAE entities whose main activity is distribution and/or service centre operations. Licensees that are engaged in Banking, Insurance, Investment Fund Management, Lease-Finance, Shipping, Intellectual Property or Headquarter Business may also purchase goods for, and/or provide services to foreign group companies as a regular part of their business operations. To prevent duplicate reporting, such Licensees are not also considered engaged in a Distribution and Service Centre Business. UAE entities that only purchase goods from third parties, or that only provide services to third parties, are not subject to the Regulations (as a Distribution and Service Centre Business).

Entities that carry out the above-mentioned entities are required to file Economic Substance Notification.

The MoF has issued a detailed Appeal user guide to help Licensees file ES Appeal. The same can be Download Here

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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FAQs

What is the Due date for filing Notification under the UAE Economic Substance Regulations ?

The due date for filing Economic Substance Notification is  within six (6) months from the end of the relevant Financial Year.

What are the consequences of not filing Notification under the UAE Economic Substance Regulations within the prescribed time ?

The following   penalties would be levied for delayed filing of Notification under the UAE Economic Substance Regulations : –

First Non-compliance of Economic Substance Notification Penalty of AED 20k would be levied in case of Failure to submit an ES Notification.
Recurring non-compliance in subsequent year an administrative penalty of minimum of AED 4,00,000 would be levied.

 

What are the ES filing requirement for parent company and its branches in the UAE?

Branches registered in the UAE are an extension of their “parent” or “head office” and do not have separate legal personalities. 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 ES Notification and/or Economic Substance Report.

What are the ES filing requirement for a UAE parent company and its branches in the UAE?

Branches registered in the UAE are an extension of their “parent” or “head office” and do not have separate legal personalities. As such, the “parent” or “head office” registered in the UAE is required to file a  one composite ES Notification and/or Economic Substance Report    in respect of  itself and all its branches.

What are ES filing obligations for company under liquidation in the UAE?

A Licensee and an Exempted Licensee shall be subject to the ESR Regulations as long as such entity continues to exist.

Where an entity carries out a Relevant Activity during a liquidation or winding up process, the entity, its liquidators (or equivalent) must ensure that the entity continues to satisfy all its obligations under the ESR Regulations.

If an entity is in liquidation or being wound up, it must continue to satisfy the Economic Substance Test for any period during which it carries on a Relevant Activity and derives Relevant Income. This would include full adherence to completing the ESR Notification and reporting requirements prescribed under the ESR Regulations.