Insights

Amendments to the Economic Substance Regulations and Guidance 

3 September 2020

Overview

The United Arab Emirates (UAE) has amended and replaced its Economic Substance (ES) Regulations (ESR), Cabinet Resolution No.31 of 2019, with Cabinet Resolution No.57 of 2020 (the New ESR). The New ESR is applicable retrospectively from 1 January 2019.

Updated guidance has also been issued in Ministerial Decision No. 100 of 2020 (New Guidance), providing further clarifications on certain ES matters. As a consequence, the previous guidance (i.e. Ministerial Decision No. 215 of 2019) (Guidance) is no longer applicable.

The New ESR and New Guidance introduced some important changes to the scope of the ESR, covered entities, compliance requirements and governing authorities.

The Ministry of Finance (MoF) has also updated its Frequently Asked Questions to be in line with the New ESR and New Guidance.


Key amendments introduced

Detailed below is a synopsis of the key changes provided in the New ESR and New Guidance which should be closely reviewed by all UAE businesses. Please refer to the attached PDF a more detailed review of the amendments.

  1. Definition of Licensee
    The amended definition now covers i) juridical persons (incorporated inside and outside the UAE); or ii) unincorporated partnerships; which are registered in the UAE and that conduct a relevant activity (RA). Indication that natural persons, sole proprietors, trusts and foundations are no longer in scope of the New ESR. 

  2. Treatment of Branches
    The treatment of UAE and foreign branches has been clarified. Broadly, branches registered in the UAE are now seen as an extension of their parent or head office and do not have separate legal personality. Branches being subject to corporate income tax at head office level may be exempt from the application of the New ESR.

  3. Exempted Licensees
    New exemptions include: i) Investment funds, ii) entities tax resident outside UAE, iii) UAE resident owned businesses not part of a MNE Group and with only domestic transactions and iv) branches of foreign companies being subject to tax outside the UAE. The government ownership exemption has been withdrawn.

  4. Definition of Connected/Related Person
    Clearer guidance on which transactions would be treated as performed between related persons.

  5. Distribution and Service Centre Business RA
    The updated definition of the Distribution and Service Centre Business in the New ESR excludes the reference to ‘import and store the goods in the UAE’. Therefore, if a UAE entity is purchasing and selling goods but the goods do not physically enter/are stored in the UAE, the entity would be considered conducting an RA.

  6. ES Notification
    Licensees that have already submitted a Notification directly to their Regulatory Authorities are required to re-submit a notification in accordance with the provisions of the New ESR at the MOF Portal once available.

  7. ES Report
    Licensees are now required to provide financial reports as part of the ES Report submission.

  8. Penalties for non-compliance
    Penalties for non-compliance have been increased significantly.

  9. Regulatory Authority and Introduction of National Assessing Authority
    The Federal Tax Authority (FTA) has become the “National Assessing Authority” to oversee compliance and control with the New ESR. The Regulatory Authorities will remain involved providing support to the FTA.

  10. Exchange of information
    The MoF has expanded the cases where information would be exchanged with foreign competent authorities from being a punitive measure (or related to High Risk IP) to be a source of information for confirmation of tax residency of UAE entities and branches.


Key takeaways:

  • Given that the New ESR and New Guidance override the previous ESR with effect from 1 January 2019, UAE businesses are advised to perform an assessment as to whether the current position is still valid taking into account the changes implemented.
  • In particular, distribution and service center businesses need to consider the impact of the amended definition of the Distribution and Service Centre Business to ensure that the position is correct. Businesses that have been excluded from the previous definition as goods have not been imported and stored in the UAE will now be covered under the New ESR.
  • Government owned entities that availed the government exemption from the ESR previously, will now be subject to the New ESR (unless any of the cases for exemption applies) and need to change their notifications.  
  • Branches may be exempt from the applicability of the New ESR. However, it should be confirmed if the applicable documentation from the foreign parent company / head office can be provided to the Regulatory Authorities / Assessing Authority.
  • All businesses falling under the definition of a Licensee as per the New ESR will be required to resubmit the notification in the MoF portal that will be released soon.
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