Economic Substance Regulation (ESR)
Zero Tax Jurisdictions must introduce Economic Substance Regulations in UAE to counter (harmful) Profit Shifting is the purpose of ESR, an initiative by Organization for Economic Co-operation and Development
The United Arab Emirates has in coordination with the Ministry of Finance implemented Economic Substance legislation in order to comply with its commitment as a member of the OECD (to comply with EU’s requirements to be removed from the list of non-cooperative tax nations). The Economic Substance Regulations are applicable to all the Licensees within the UAE’s jurisdiction and include all Licensees operating within free-zones in UAE. Offshore Companies, any person or company holding a trade license or certificate of incorporation to carry out any business activity is coming under Economic Substance Regulations. This is in the benefit of the real investors in UAE & a company in UAE will have its Global value.
Because of zero corporate tax many global business house has opened their Head Offices in UAE. Sometimes the profit shifting to UAE is harmful and loss for countries where there is tax.
Economic Substance rules pointed at companies based in low tax jurisdictions such as Bahrain, Bermuda, BVI, Cayman Islands, Isle of Man, Jersey, Guernsey, Mauritius, Bahamas, Seychelles, and United Arab Emirates.
- Reporting income in low tax jurisdiction without any real economic activity and substance in that jurisdiction.
- Activities in relation to the income effectively take place outside of the low tax jurisdiction.
Economic Substance Regulations
- Objective is to avoid artificial/harmful “Profit Shifting” that is badly impacting the economy of Europe, America, India and many other countries where there is Corporate Tax.
- Required reporting under the ESR is a means to monitor and achieve this goal, so just by opening a small company in UAE, companies can’t save tax.
The guideline apply to companies that carry out any of the following Relevant Activities.
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Services Business
Sanctions under the ESR were introduced by UAE Cabinet of Ministers Resolution on ESR and further explained in.
Annual Notification & Economic Substance Report. What All Licensees must follow.
Annual Notification to Regulatory Authority – “with effect from 1 January 2020”.
- Most UAE Free Zones made 30th June 2020 as their dead line. Now after the amendment it is 31st January 2021.
- Financial years commencing on or from 1st January 2019
- Notify whether any Relevant Activities are carried out during reportable period
- If yes, indicate whether gross income in relation to Relevant Activity is subject to tax outside UAE
- If IP Business, indicate if also High-Risk IP Business
Submission of Economic Substance Report within 12 months after FY-end
- Type(s) of Relevant Activity
- Amount and type of income, OPEX and assets
- Number of employees with qualifications
- Information regarding CIGA’s performed
- Declaration whether Economic Substance test is met
- Further information in case of High-Risk Intellectual Property Business
- Further information if Relevant Activity is outsourced
Amendment in Economic Substance Regulations in UAE:
Cabinet Decision No 57 of 2020
UAE Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020 on 10 August 2020 which repeals and replaces Cabinet Resolution No.31 of 2019. The amended ES Regulations apply from 1 January 2019 and introduce important changes to the scope and application of the UAE economic substance regime in UAE.
Last date to file Notification and Report is 31st December 2020
All Licensees including Exempted Licenses that have submitted a Notification to a Regulatory Authority before (e.g. by the 30 June 2020 deadline) are required to resubmit their Economic Substance Notification by no later than 31st January 2021 once the Ministry of Finance Portal goes live. Now Ministry of Finance Portal is Live and Team Elevate has successfully taking care ESR Assessment , Notification and ESR filing.
The due date for submission of Economic Substance report with Ministry of Finance is also 31st January 2021.
An Exempted Licensee includes any of the following entities registered in the UAE and which carry out a Relevant Activity:
(a) an Investment fund
(b) an entity that is tax resident in a jurisdiction other than the UAE
(c) an entity wholly owned by UAE residents and meets the following conditions:
(i) the entity is not part of a MNE Group
(ii) all of the entity’s activities are only carried out in the UAE
(d) a Licensee that is a branch of a foreign entity the Relevant Income of which is subject to tax in a jurisdiction other than the State.
Exclusions from the definition of Licensee are: Natural persons, Sole proprietors, Trust and Foundations. Therefore, they do not need to file a notification or meet the ES Tests.
Failure to file Economic Substance Notification – Fixed Penalty of AED 20,000/-
Failure to conduct Economic Substance Test and to submit ESR Report – Fixed Penalty of AED 20,000/-
Subsequent Failure – Fixed Penalty of AED 400,000/- & Risk of Non-renewal of License or Deregistration.
Failure to provide accurate information – Fixed Penalty of AED 50,000/-