Economic Substance Regulations UAE
What is the purpose of the Notification?
The Notification is a method for Regulatory Authorities to collect certain initial information in respect of Licensees and their activities in the UAE for the relevant Reportable Period. The information provided as part of the Notification is a prerequisite to filing an Economic Substance return for the same period (if required).
Guidance
https://docs.google.com/forms/d/e/1FAIpQLSftjARO0KotgVJbpb0GFWg62hW2ePEobr9i79H4E7oKxV39Eg/viewform
Who needs to submit a Notification?
A business must submit a Notification to their Regulatory Authority if it undertakes any of the following Relevant Activities during the relevant accounting period:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarter Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business
Please refer to the Relevant Activity Guide for further information and an explanation on each of the above Relevant Activities.
Relevant Activities Guide
Relevant-Activities-Summary
What is the Reportable Period?
The Reportable Period is the financial period to which the Notification relates to that commenced on or after 1 January 2019.
The end of the Reportable Period should correspond to the financial year [end] of the business, and the period that financial statements (if any) are prepared.
What period should the information provided by the Licensee in the Notification relate to?
The information provided by a Licensee in the Notification should relate to the Licensee’s Reportable Period.
For example, a Licensee submitting a Notification in June 2020 for the Reportable Period ending 31 December 2019 should provide information for the period 1 January 2019 (or a later date for a Licensee that was established after 1 January 2019, but that has set a first 31 December 2019 financial year end) to 31 December 2019.
What is the deadline to submit the Notification to the Regulatory Authority?
30 June 2020 for businesses with a financial year commencing on or after 1 January 2019 and ending on or before 31 December 2019. The statutory deadline for businesses with a different financial year end will be communicated in due course.
What if the business has a financial year that ends after 31 December 2019, e.g. a financial year ending 31 March 2020 or 30 June 2020?
Whilst your Regulatory Authority may allow or request you to file a Notification for financial periods ending after 31 December 2019 (for example, 31 March 2020 or 30 June 2020) by 30 June 2020, this is not a requirement under the Economic Substance Regulations UAE. The statutory deadline for periods ending after 31 December 2019 will be communicated in due course.
No Economic Substance administrative penalties will apply to businesses with a reportable period ending after 31 December 2019 for Notifications not submitted by 30 June 2020.
What if the business has a financial year that started in 2018 and ended during 2019 (e.g. 1 July 2018 to 30 June 2019) – is the business required to file a Notification?
No. The Economic Substance Regulations UAE only apply to financial years commencing on or after 1 January 2019.
In the above example, the Licensee’s first reportable period will be 1 July 2019 to 30 June 2020, and there is no statutory requirement for the business to file a Notification for this period by 30 June 2020. The statutory Notification filing deadline for the period ending 30 June 2020 will be communicated in due course.
What if the business has a long first accounting period which started in 2018 and ended during 2019 (e.g. 1 June 2018 to 31 December 2019) – is the business required to file a Notification for this period by 30 June 2020?
No, in the above example, the Licensee’s first reportable period will be 1 January 2020 to 31 December 2020 and the first Notification would be due in 2021, the deadline for which will be communicated in due course.
If the business does not undertake a Relevant Activity – is it still required to file a Notification?
Under the Economic Substance Regulations UAE, only businesses that undertake a Relevant Activity during a Reportable Period are required to submit a Notification. However, certain Regulatory Authorities may request all businesses to submit a Notification, regardless of their activity.
If the activity of a business has changed during a Reportable Period – which activity should be reported in the Notification?
The business must report all Relevant Activities undertaken during the Reportable Period.
Where can a Licensee find who is their Regulatory Authority?
The relevant Regulatory Authorities for the purposes of the Economic Substance Regulations UAE are set out in Cabinet of Ministers Resolution No. 58 of 2019. In general, the Regulatory Authority is the authority that has issued the trade license / permit to the business. The main exceptions to this general rule are for:
- Businesses registered onshore, which would need to submit their Notification with the Ministry of Economy
- Banks that are licensed by the UAE Central Bank (for their entities that are not licensed / regulated by the DIFC or ADGM)
- Insurance companies that are regulated by the Insurance Authority
- Investment Fund Management Businesses that are licensed by the Securities and Commodities Authority
Where a Licensee has a dual license, it should only submit one Notification to the Regulatory Authority that issued the Licensee’s primary/main trade/commercial license when it was first incorporated / registered in the jurisdiction in which such Licensee has its premises, employees and other relevant Business Documents.
Is the Notification an annual requirement?
Yes, a Notification must be filed every year.
How to submit a Notification?
Please consult with your Regulatory Authority to confirm the mechanism for submitting the Notification.
Can a single Notification be filed for multiple Licensees?
No, each Licensee must file a Notification on a stand-alone basis, irrespective of whether the Licensee is part of a consolidated group for accounting purposes.
What if a business was incorporated / registered after the Economic Substance Regulations UAE was enacted – is it required to file a Notification by the 30 June deadline?
The Economic Substance Regulations UAE apply to financial years starting on or after 1 January 2019. Any Licensee with a financial year that commences on or after 1 January 2019 and which ends on 31 December 2019 will be required to file a Notification no later than 30 June 2020, irrespective of when the Licensee was incorporated / registered.
For example, a Licensee that was incorporated after the Economic Substance Regulations UAE were enacted (e.g. May 2019) that has set a 31 December 2019 financial year end would be required to file a Notification by 30 June 2020.
What if the Licensee is in the process of liquidation – does it still need to file a Notification?
Licensees that are in the process of liquidation that carries out a Relevant Activity and derives Relevant Income in the year of liquidation, the entity or its liquidators must ensure that all obligations under the ESR Regulations are satisfied, including filing a Notification and Report for the period up to liquidation (where applicable).
Should a business only look at their commercial licence, trade licence or permit to determine if they undertake a Relevant Activity?
No, businesses should take a ‘substance over form’ approach to determine whether or not they carried on a Relevant Activity. This means looking beyond what is stated on the commercial licence, trade licence or permit and making an assessment based on the activities actually undertaken during the Reportable Period.
Should a Licensee consider “net accounting profit” to determine whether or not it earned income from a Relevant Activity?
No. Income from a Relevant Activity means the gross income earned from that activity as recorded in the books and records for the Reportable Period prepared under applicable accounting standards, including income that is generated outside of the UAE, and without deducting any type of costs or expenditure. In the context of income from sales or services, gross income means gross revenues from sales or services without deducting the cost of goods sold or the cost of services.
How can the income earned from a Relevant Activity be subject to tax outside the UAE?
Income from a Relevant Activity is considered to be subject to tax outside the UAE where:
- The Licensee has a taxable presence / permanent establishment in a foreign country and it reports all or part of the income from the Relevant Activity in the corporate income tax return filed in that foreign country; or
- The Licensee is a UAE branch of a foreign juridical person and all the income of the UAE branch is reported in the foreign juridical person’s corporate income tax return, even if the foreign jurisdiction exempts branch profits from corporate income tax.
How do you determine if a Licensee is a High Risk IP Licensee?
A Licensee is a High Risk IP Licensee if it receives income from an Intellectual Property (“IP”) Asset and meets all of the following three requirements:
- The Licensee did not create the IP Asset which it holds for the purpose of its business, and
- The Licensee acquired the IP Asset from either – a. A group company, or b. In consideration for funding research and development by another person situated in foreign jurisdiction, and
- The Licensee licenses or has sold the IP Asset to one or more group companies, or otherwise earns separately identifiable income (e.g. royalties, licence fees) from a foreign group company in respect of the use or exploitation of the IP asset.
Please refer to Relevant Activity Guide for further information in respect of High Risk IP Licensees.
Relevant Activities Guide
What is a “Parent Company”?
- holds a majority of voting rights in the Licensee; or
- has the right to appoint or remove a majority of the boards of directors of the Licensee; or
- controls alone, pursuant to a joint arrangement with other shareholders or members, a majority of the voting rights in the Licensee; or
- has the right to exercise, or actually exercises, dominant direct influence or control over the Licensee.
What is an “Ultimate Parent Company”?
The entity that:
- directly or indirectly owns a sufficient interest in the Licensee, such that it is required to prepare consolidated financial statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on a public securities exchange in its jurisdiction of tax residence; and
- there is no other entity in the group that owns directly or indirectly an interest described in subsection (a) above in the entity under (a)
What is an “Ultimate Beneficial Owner”?
An individual who directly or indirectly owns twenty five percent (25%) or more of the share capital of the Licensee.
A Licensee may have one or more Ultimate Beneficial Owners
In what cases can a Licensee be tax resident outside the UAE?
A UAE Juridical person (e.g. a LLC or PJSC) is considered tax resident outside the UAE if another country treats the UAE entity as a local company under its corporate income tax legislation (usually on the basis of a central management and control type test) and the income of the UAE entity is subject to corporate income tax in the foreign country because of its tax residence there.
Source: https://www.economy.gov.ae/english