Economic Substance Regulation (ESR)
As a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued economic substance regulation (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019.
On 11 September 2019, guidance on the application of the Regulations was issued, Ministerial Decision No. 215 of 2019, and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations.
Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020, and updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020 The Regulations require UAE onshore and free zone companies and certain other business forms that carry out any of the defined “Relevant Activities” listed below to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).
Relevant Activities:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP”)
- Distribution and Service Centre Business
The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority, and complete and submit to the same Regulatory Authority an Economic Substance Report within 12 months from the end of their financial year (e.g., 31 December 2020 for entities with a financial year ending 31 December 2019).
An entity is not required to meet the Economic Substance Test and file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt. A Notification form will need to be submitted regardless.
Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), as well as other administrative sanctions such as the suspension, revocation, or non-renewal of the entity’s trade license or permit.
UAE entities will need to assess whether and which of their activities fall within the scope of the economic substance regulation, and how to ensure they meet the economic substance requirements in respect of each Relevant Activity. This is both a qualitative and quantitative assessment that would involve consideration of operational, financial, tax/transfer pricing, legal, and governance matters.
How Parkar can help you?
Impact Assessment
We can assess if the entities and activities are within the scope of the economic substance regulation and/or whether the entity can benefit from any of the exemptions in the Regulations. This is an essential step for all businesses to determine what to notify the Regulatory Authorities, and what economic substance requirements need to be met.
Gap analysis and action plan
We can carry out a gap analysis that represents the current substance and corporate governance processes against what is required under the regulations.
Where any gaps are identified, we can recommend appropriate corrective actions and other measures to ensure compliance, such as:
- Changes to the operating/business model or transfer pricing policy
- Designing appropriate corporate governance policies, processes, and controls
- Use of outsourcing arrangements
We can suggest to you how to document that relevant activities are being directed and managed from the UAE through board meeting minutes and other record keeping.
We can advise you on the suitable level of economic substance, relative to the activities undertaken, in the form of management and operational activities.
Reporting
We can support you in the preparation and submission of your annual notifications and economic substance report to the Regulatory Authorities.
As a leading provider of assurance, tax, and business consulting services in the UAE, Parkar is perfectly positioned to help you in determining whether the UAE substance regulations apply to your business or entities, and how to ensure you can demonstrate the required economic substance in the UAE.
Connect with our team at +971522280429
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Economic Substance Regulation (ESR)
Failure to comply with the Regulations can result in penalties, Let us do the assessment of your activities and transactions for the financial year and let you know whether the entity is within the scope of ESR or whether it can benefit from any of the exemptions. We can support you in the submission and preparation of your ESR report to regulatory authorities.
