We are FTA Certified Tax Agent & Tax Agency in UAE

Economic Substance Regulations is another compliance requirement for entities registered in the UAE. The United Arab Emirates (UAE) Ministry enacted the Cabinet Resolution no. 31/2019 with effect from 30th April 2019 on Economic Substance Regulations in the UAE. This was followed by the Ministerial Decision 215 for the year 2019 giving directives for the implementation of the provisions of Cabinet Decision no. 31/2019. The rule is released on 30th April 2019 and is applicable to all Licensee carrying on the following Relevant Activities in the UAE, including the Free Zone or Financial Free Zone; with effect from the year 2019.

So, Entities will now have to comply with Cabinet resolution 57/2020 & Ministerial Decision 100 for the year 2020 giving directives for the implementation of the provisions of Cabinet Decision no. 57/2020.

One of the four criteria in the framework of OECD is the absence of a requirement that the activity is substantial. In addition, the European Union is working to have a Tax Governance at Global Level in order to curb Tax avoidance, evasion. The Economic Substance Regulations is in consonance with the global standard set by the Organization for Economic Co-operation and Development (OECD) on Harmful Tax Practices. UAE also joined the all-inclusive framework of OECD on Base Erosion and Profit Shifting (BEPS) and is committed to having the minimum standards in the State. UAE is “No or Only Nominal Tax Jurisdiction” (NOON’s) environment and is in line with other jurisdictions with the same environment who are parties to this framework.

Relevant Activities under UAE Economic Substance Regulations

• Banking Business
• Insurance Business
• Investment Fund Management Business
• Lease-Finance Business
• Shipping Business
• Headquarters Business
• Intellectual Property Business
• Holding Company Business
• Distribution & Service Center Business

Exempt Licensee as per Cabinet Resolution 57/2020

The Scope of Exempted Licensee as per Cabinet Resolution No. 57/2020 is extended. Following entities fall in Exempted Licensee:

• An Investment fund
• A licensee that is Tax Resident in a Jurisdiction other than in the UAE
• A licensee that is wholly owned by one or more UAE Resident and meets the following conditions:
• An entity should not be part of MNE Group
• An entity should carry business only in the UAE
• A licensee that is the branch of a foreign entity the Relevant Income of which is subject to tax in a jurisdiction other than UAE

How to meet the Economic Substance Regulation Test?

• Check whether the entity is directed and managed in the State in relation to that activity.
• Check whether the entity conducts/ performs Core Income-Generating Activity (CIGA) in the State.
• Check whether the company employs the adequate number of qualified full-time employees or incurs an adequate level of operating expenditure and adequate physical assets in the state.
• If CIGA is conducted by another entity for the relevant licensee, then check whether the Licensee has full control and is be able to monitor the activities of another entity.

ESR Notification should be filed by all Licensee and Exempted Licensee annually providing the following details:

• Date of commencement and end of Financial Year
• Relevant Activity being carried
• Whether Revenue generated from such Relevant activity during relevant Financial year
• Other information as required by the Regulatory Authority