In the year 2019, 30th of April, the Economic Substance Regulation, known as ESR were presented in the UAE through Cabinet of Minister Resolution No. 31 of 2019. The Ministry of Finance (MOF) through Ministerial Decision 215 of 2019 gave explicit direction on those regulations on the 11th of September 2019. Authoritatively, 2019 was considered as the ESR’s pioneer year for all UAE based entities such as the companies and organizations, branches and business permit holders included.
A revised legislation overhauling the Economic Substance Regulation (ESR) has been published by the UAE this 2020. There are explicit perspectives in the ESR nowadays which are primarily prioritized and overhauled. UAE based entities that are covered by the ESR are all reminded of these changes ahead of the deadline of the first ESR report on December 31, 2020.
Voiding the effectivity and supplanting the previously applicable Resolution No. 31 of 2019, a new resolution was formally adapted by the Cabinet of Ministers on the 10th of August 2020. The new resolution is Resolution No. 57/2020 which was announced to the public on the 2nd of September 2020. In addition to this, a renewed Ministerial Decision 100/2020 was likewise formally adapted on the 19th of August 2020. The announcement for this has been done to the public on the 2nd of September, voiding and ousting the primary Decision 215 of 2020.
What is the Resolution 57/2020?
Resolution 57/2020, a new resolution voiding the effectiveness of the previous Decision 215 of 2020, came up with a number of changes to the original ESR. A new category of a licensee under the ESR include among others have been presented as the Exempted Licensee:
- Investment Funds
- Licensees which are tax residents in another jurisdiction
- Branches of foreign entities which relevant income is subject to tax resident in a jurisdiction outside the UAE
- Entity conducted entirely by the residents in the UAE and not correlated with the MNE, in any given manner
Recording a notification and providing documentary evidence demonstrating such a position should be done by the exempted licensees in order for them to make the most of their exempt status for ESR purposes.
While the UAE Federal Tax Authority has now been appointed as the authority to:
- Evaluate if the licensees have met the economic substance tests
- Function as the National Assessing Authority
- Enforce administrative penalties for non-compliance
- Listen and settle on a decision with respect to the appeals filed by the licensees, among others
- Exchange information with competent authorities
Beforehand, the regulatory authorities of each licensee, including the relevant UAE free zone authorities and the ministry of economy, among others have the only rights with respect to the above-mentioned powers.
A New Set of Penalties
As indicated by Resolution 57/2020, the penalties for non-compliance have increased to the relevant amounts. The following penalties are as follows:
|Name of Activity
||Penalty(under Resolution 57/2020)
|1. Failure to submit the ESR Notification
||USD 5,450 (AED 20,000)
|2. Failing the economic substance test
||USD 13,625 (AED 50,000)
||USD 2,725 to US13,625
|3. Providing inaccurate information
As mentioned, the imposition of penalties has been shifted now to the UAE Federal Tax Authority. Corresponding to this, a strict policy against non-compliance must be expected.
Relevant Activities of the Resolution 57/2020
As is stated from the previously applicable regulation, all the organizations which have an applicable license for conducting “Relevant Activities” are required to conform with ESR requirements. Nonetheless, there are some minor changes to what the ESR considers “relevant activities.” The licensees’ demonstration of such activities ought to be in terms of sufficient economic substance in the UAE. Such changes incorporate, among others, further explanation identifying the relevant activities of a distribution and services business and high-risk IP business.
The licensees that submitted the ESR Notification in June and currently preparing for the ESR report filing before the end of this year ought to likewise consider the relevant changes.
ESR Reporting through a New Portal
Before, all the reports, notifications, and related documentation ought to be submitted by licensees with their respective regulatory authority. Currently, the UAE MOF will be launching a portal to facilitate the electronic filing of all the reports, notifications, and other related documentation, this has been clarified by the Decision 100/2020. Nevertheless, the Decision does not state when this portal will be accessible.
The first deadline for submitting the ESR Reports, which is on December 31, 2020, is drawing nearer. Businesses must consider these recent changes.
Economic Substance Regulations (ESR)