Updated Economic Substance Regulations (ESR) and Guidance
In August 2020, the UAE Cabinet issued updated economic substance regulations (“New ESR”) which revoked and replaced the previous economic substance regulations introduced in 2019. The New ESR is accompanied by updated guidance on the application and interpretation of the New ESR and notice regarding the deadline for submission of notification and reporting under the New ESR.
The New ESR together with the supporting documents have introduced important changes to the economic substance regime. All entities should re-assess whether they fall within the scope of the New ESR and if so, will be required to submit (or re—submit) notification as a first step to the Ministry of Finance portal which has now been launched during the first week of December 2020 here
Key changes to the ESR regime include:
- Centralised electronic notification and reporting via a portal to the Ministry of Finance.
- Appointment of the UAE Federal Tax Authority (FTA) as the authority to: (a) assess whether licensees have met the economic substance tests; (b) impose administrative penalties for non-compliance; and (c) hear and decide on appeals filed by licensees, among others. These powers were previously in the hands of the regulatory authorities of each licensee ie DIFC, Ministry of Economy etc
- Increased penalties for non-compliance.
- New definitions of:
- “Licensees” which now excludes natural persons, sole proprietors, trusts and foundations
- “connected person” which is now defined as an entity part of the same Group as a Licensee. A "Group" is defined as "two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable thereto".
- “Distribution and Service Centre Business” now extends to any service provided to a foreign related party and imported goods do not need to be stored in the UAE to fall within the scope of this activity.
- New category of “Exempted Licensees” which apply to:
- Investment funds;
- Licensees which are tax resident in another jurisdiction and subject to corporate tax on all its income from a relevant activity (withholding tax is not sufficient);
- entities wholly (legally and beneficially) owned by UAE residents residing in the UAE and are:
- not part of a multinational group; and
- all the entity’s activities are only carried out in the UAE
- branches of foreign entities subject to tax in a jurisdiction outside of the UAE.
What do you need to do?
Every Licensee and Exempted Licensee is required to submit notification electronically via the Ministry of Finance’s portal within 6 months of the Licensee’s financial year end.
Every Licensee that is required to submit an ESR report will need to do so via the Ministry of Finance’s portal with 12 months of the end of their financial year. For example, the deadline for filing an ESR report for a Licensee with a financial year commencing on or after 1 January 2019 and ending on or before 31 December 2019 is 31 December 2020.
Legal entities that have already submitted notification to their “Regulatory Authority” will be required to re-submit their notification via the Ministry of Finance’s portal once it goes live in the first week of December 2020.
The first official deadline for notifications and reports submission will fall on 31st December 2020.
Further information regarding the deadline for notification and reporting can be found here.
How can PRO Partner Group help?
PRO Partner Group is available to assist you with your assessment (or re-assessment) of the applicability of the New ESR to your business. If your business is determined to fall within the scope of the New ESR, then PRO Partner Group can assist you with the preparation and submission of notification and a report to the Ministry of Finance.
PRO Partner Group works in cooperation with ESR Assessment Specialists and our Audit and Tax partners to provide detailed ESR assessment for your company if required.
If you are already a client of PRO Partner Group then please contact your client relationship manager for further information on ESR assessment and submission. Alternatively, please call us on +971 (0)4 456 1761 for Dubai, +971 (0)2 448 5120 for Abu Dhabi, email us at email@example.com or complete the contact form below and we will be delighted to assist you with your ESR assessment and submission obligations.