The UAE has revised its Economic Substance Regulations through Cabinet Resolution No. 57 of 2020 (New Regulations). Supplementary guidance from the authorities was provided through Ministerial Decision No.100 of 2020 from the UAE Ministry of Finance, which includes an updated Relevant Activities Guide. The amendments have revoked UAE Cabinet Resolution No. 31 of 2019 concerning Economic Substance Regulations.
UAE entities that are in scope must comply with the regulation within the set timeframe as setout below or face a fine.
The key amendments are as follows:
Change to Definition of Licensees
The definition of “Licensees” required to comply with the New Regulations now applies only to a corporate person or an unincorporated partnership. This definition can include entities incorporated inside or outside of the UAE. The New Regulations applies to those entities that have a presence in the UAE and are conducting a Relevant Activity. Natural persons, trusts, sole proprietors, or foundations no longer fall within the scope of the definition.
New definitions for “Connected Person” and “Group” have been introduced within the New Regulations.
New Exemption Categories
The new exemption categories now include:
- Investment funds;
- Entities which are wholly owned by UAE residents and which are not part of a multinational enterprise group and which only carry out their activities in the UAE;
- Entities which are a tax resident outside of the UAE; and
- Branches of foreign parent companies where the relevant income is subject to tax outside the UAE.
Majority government-owned entities are no longer exempt unless they fall within one of the updated exemptions of the New Regulations. Those Licensees that benefit from an exemption must provide evidence that the entity qualifies for such exemption.
Changes to Reporting Requirements for branches
- The New Regulations recognise that UAE branches of UAE companies do not have separate legal personalities from their parent. All that is required to be filed is a single notification concerning the Relevant Activities of the UAE parent company together with all the UAE branches of that parent
- UAE companies that conduct Relevant Activities through a branch registered outside the UAE, the UAE company does not need to report and demonstrate economic substance where income earned through the branches is taxed in the overseas jurisdiction where the branch is registered
- Foreign companies with a branch office registered in the UAE do not need to demonstrate economic substance under the New Regulations, provided the income earned by the branch’s activities is subject to tax in the overseas jurisdiction
Changes to requirements for the Distribution and Service Centre Business Relevant Activity
There is no longer a requirement to import and store goods in the UAE for the ‘distribution’ part of the Distribution and Service Centre Business Relevant Activity.
The UAE Federal Tax Authority has been appointed as the National Assessing Authority to oversee the compliance and regulatory control of the Economic Substance Regulations. The New Regulations have increased the penalties for non-compliance which are now between AED 20,000 and AED 50,000, as well as the potential suspension or non-renewal of the license. Specific updated filing deadlines have not been included within the New Regulations and it appears that the deadline for economic substance reports for the 2019 financial year will remain as 12 months after the end of the relevant financial year.
At CBD we assist our clients by ensuring they have regular updates about any local regulatory changes that require action and therefore ensure compliance. If you would like any more information about the ESR requirements, please contact us at email@example.com.