UAE Economic Substance Regulation ESR: Major Overhaul

New ESR law 2020

The United Arab Emirates (“UAE”) Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020 on 10 August, 2020. This resolution replaced the original Cabinet Resolution No.31 of 2019 (the original ESR law) concerning the Economic Substance Regulation (“ESR”). The UAE Ministry of Finance has now also updated its website with further information regarding the changes to the regulation. Since the application of the new resolution is retrospective (i.e. effective 1 January, 2019), all companies are advised to revisit Notifications already submitted.

The most prominent update in Cabinet Resolution No. 57 of 2020 was the appointment of the Federal Tax Authority (“FTA”) as the National Assessing Authority for the assessment and determination of ESR compliance and governance.

Major changes introduced in the ESR legislation include:

  1. The Federal Tax Authority has been appointed as the National Assessing Authority for the enforcement, assessment and determination of compliance with ESR rules by the licensees.
  2. The amended ESR (issued on 10 August, 2020) now covers juridical persons (those with separate legal personality) and unincorporated partnerships, while excluding natural persons – including sole proprietors, trusts and foundations. Also, the licensees that are now exempt include Investment funds, entities being Tax Resident outside the UAE and UAE branches of a foreign company (head office / parent company) whose relevant income is subject to Tax in a foreign country.
  3. As branches do not have separate legal identity from their parent or head office, they are not regarded as “Licensees”.
  4. Distribution & Service Center Business: The new regulation emphasises and clarifies that, for a trading business, there is no requirement to import and stock goods in the UAE in order to be considered as a Distribution and Service Center Business. Further, the law also clarifies that any services provided to foreign connected persons shall be considered a relevant activity (previously it stated that such services are only considered a relevant activity if they are “in connection with a business outside the State”).
  5. A Connected person shall be any entity that is part of the same group as a Licensee. Groups are 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”.
  6. High Risk Intellectual Property Licensee The definition of a High-Risk Intellectual Property Licensee has been limited to an Intellectual Property Business that meets all of the following conditions:
    a) Licensee did not create the IP asset;
    b) Licensee acquired the IP asset from a connected person or in consideration for funding, research and development by another person situated in a foreign jurisdiction, and
    c) The Licensee has sold the intellectual property asset to a connected person or earns separately identifiable income from a foreign connected person in respect of the use or exploitation of the intellectual property asset.
  7. As the application of the amended ESR law is retrospective (i.e. effective 1 January, 2019), companies that have already submitted the ESR notifications based on the previously issued Cabinet Resolution No.31 of 2019 will need to re-submit the notification based on the new law for ESR i.e. Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020. Further guidance on this matter is yet to be announced by the Ministry of Finance.
  8. The deadline for the annual ESR Notification is within 6 Months from the end of the Licensee’s financial year.
  9. The deadline for the annual ESR Report is within 12 months from the end of the financial year, same as before.
  10. The Penalty for non-submission of the ESR Notification by a licensee is now increased to AED 20,000 while the penalty for non-submission of the Annual report is now AED 50,000.

Given the above updates, and in particular the appointment of the FTA, the scope of ESR is increasing and demonstrates the UAE’s increased commitment towards international tax and reporting compliance. Also, the appointment of the FTA means that there shall now be a bridge between License issuing Authorities and the Federal Tax Authority. As observed in the enforcement of VAT laws in UAE, the FTA shall be thoroughly assessing the information being submitted under the ESR Notification and Annual Report.

It is strongly recommended that all Licensees re-assess and re-evaluate the already submitted ESR notification to ensure that they are in compliance with the updated regulation. Licensees that did not submit a Notification on the basis that the original ESR law did not apply to them may need to re-evaluate their position under the amended ESR law.

To understand more about how the above changes in ESR affect your business, please reach out to us on mail@Affiniax.com.

ESR Filing Deadlines

ESR Filing requirement, ESR deadline

For ease of reference we have set out below details of the requirements to notify as communicated by the selected regulatory authorities, together with the deadline:

Regulatory AuthorityWho is required to fileDeadline
ADGMOnly entities/ licensees that are carrying out relevant activityBy 30 June 2020
DAFZAll entities/ licensees, including those who do not undertake relevant activityBy 15 June 2020 (extended from 31 May 2020)
DMCCAll entities/ licensees, including those who do not undertake relevant activityBy 30 June 2020
RAK ICCAll entities/ licensees, including those who do not undertake relevant activityBy 30 June 2020
Securities and Commodities Authority (SCA)SCA have contacted via email all Investment Management Firms, Management Company Firms regulated by SCA requesting submission of the notification formBy 30 June 2020 (extended from 31 March 2020)
AJMAN FZAll entities/ licensees, including those who do not undertake relevant activityBy 30 June 2020
RAK EZAll entities/ licensees, including those who do not undertake relevant activityBy 30 June 2020
Dubai World Trade CentreOnly entities/ licensees that are carrying out relevant activityBy 30 June 2020
Dubai Aviation City CorporationAll entities/ licensees, including those who do not undertake relevant activityBy 23 June 2020 (extended from 7 June 2020)
Dubai Healthcare City (DHCC)Only entities/ licensees that are carrying out relevant activityBy 7 June 2020 (extended form 31 May 2020)
Ministry of EconomyOnly entities/ licensees that are carrying out relevant activityBy 30 June 2020
Hamriyah Free Zone Authority (HFZA)Only entities/ licensees that are carrying out relevant activityBy 30 June 2020
Sharjah Airport International Free Zone (SAIF)Only entities/ licensees that are carrying out relevant activityBy 30 June 2020
International Free Zone Authorities (IFZA)Only entities/ licensees that are carrying out relevant activityBy 30 June 2020
Dubai Silicon Oasis (DSO)All entities/ licensees, including those who do not undertake relevant activityBy 9 June 2020 (extended from 31 May 2020)
Dubai Development Authority (DDA)Only entities/ licensees that are carrying out relevant activityBy 25 June 2020
Abu Dhabi Media Zone AuthorityAll entities/ licensees, including those who do not undertake relevant activityBy 30 June 2020
Umm Al Quwain Free Trade Zone (UAQ)All entities/ licensees, including those who do not undertake relevant activityBy 30 June 2020
Fujairah FreezoneAll entities/ licensees, including those who do not undertake relevant activityBy 15 June 2020
KIZADAll entities/ licensees, including those who do not undertake relevant activityBy 20 June 2020
Jebel Ali Freezone (JAFZA)Only entities/ licensees that are carrying out relevant activityBy 30 June 2020

Please contact Tanmay@affiniax.com if you wish to find out more or require assistance with your notification requirements.