UPDATED UAE ECONOMIC SUBSTANCE REGULATIONS

The UAE Cabinet of Ministers has issued Ministerial Decision No. 100 of 2020 with updated guidance on the UAE Economic Substance Regulations (ESR) regime. The Ministerial Decision also included an updated Relevant Activities Guide.

We urge all valued client to take note of these important changes grouped and summarised in this announcement for your convenience; including a new requirement to re-file Notifications through the Ministry of Finance portal, once available. This re-filing is required only by the licencees carrying out ESR Relevant Activities who have made their submissions in the past to RAKEZ directly. This step is also required from licencees who were previously out-of-scope, but are now in-scope as per the recent update.

Part 1 – Overview of amendments to In-Scope Entities

1. 1.1 licencees
• The definition of a licencee has been amended to be limited to juridical persons and unincorporated partnerships that are registered in the UAE (whether by way of commercial/trade licence or other form of permit) that carry out a Relevant Activity. This includes RAK ICC companies.
• Natural persons, sole proprietorships (not companies) and other business forms that are not juridical entities are no longer within the scope of the UAE ESR.
2. 1.2. Exempted Entities
• The UAE Economic Substance Regulations provide for a list of entities that are exempt from the requirements to file an ESR Report and meet the Economic Substance Test, albeit they remain under an obligation to submit a Notification. The following is a list of ‘Exempted licencees’:
1. UAE companies that are tax resident outside of the UAE;
• Ministerial Decision 100 clarifies that the entity must be subject to corporate tax on all of its income from a Relevant Activity to be able to qualify for this exemption. Payment of withholding tax would not qualify to bring an entity under this exemption.
2. Investment Funds and their underlying SPVs/investment holding entities;
3. A licencee wholly owned by UAE residents that is not part of a multinational group and that only carries out activities in the UAE;
• Ministerial Decision 100 clarifies that UAE residents includes both; (i) UAE nationals; and
  (ii) individuals holding a valid UAE residency permit and residing in the UAE.
4. UAE branches of a foreign company if the Relevant Income of the branch is subject to tax in the foreign jurisdiction.
• To claim an exemption under any of the aforementioned grounds, the licencee must file a Notification and provide sufficient documentary evidence to show that it meets the requirements of the relevant exemption category in each Financial Year in which it claims to be exempt.
• UAE companies that are majority (51% or more) owned by the UAE government are no longer exempt from the UAE ESR.
3. 1.3. Treatment of branches
• Ministerial Decision 100provides the following clarifications on the treatment of branches:
• A UAE branch of a UAE company: The UAE company must file a single Notification and ESR Report (if required) consolidating the Relevant Activities of its UAE branch/branches.
• A UAE branch of a foreign company: A UAE branch of a foreign company will not be required to file an ESR Report and meet the Economic Substance Test provided that it submits sufficient evidence that the Relevant Income of the UAE branch is within the scope of taxation in the jurisdiction of the foreign head office/parent company. The “subject to tax” test is met where the income of the UAE branch is taken into account when calculating the taxable income of the foreign head office/parent or other relevant group entity reporting the Relevant Income of the UAE branch for corporate income tax purposes, irrespective of whether the foreign head office/parent can claim a branch profit exemption under a double tax treaty with the UAE or under the domestic tax law of the jurisdiction of the foreign head office/parent.
• Foreign branch of a UAE company: A UAE company with a foreign branch will not be required to report the Relevant Activity of the foreign branch in its Notification and ESR Report (if required) if the foreign branch is subject to tax on its Relevant Income in the foreign jurisdiction.

Part 2 – Amendments to Relevant Activities

4. 2.1. Definition of a Distribution and Service Centre Business
• The definition of a Distribution and Service Centre Business has been amended to include:
• A business that purchases raw materials or finished products from a foreign group company and distributes those raw materials or finished products to related or unrelated parties in the UAE or elsewhere, irrespective of whether such raw materials or finished products are imported into the UAE;
• A business that provides services to a foreign group company, without the previous requirement that the provision of services is in connection with the foreign group company’s business outside the UAE.
5. 2.2. Definition of a High Risk IP licencee
   A High Risk Intellectual Property licencee is defined as an Intellectual Property Business that meets all of the following conditions:
1. The business did not create the Intellectual Property Asset; and
2. The business acquired the Intellectual Property Asset from either:
1. A Connected Person, or
2. In consideration for funding research and development by another person situated in a foreign jurisdiction; and
3. The business licences or 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.

Part 3 – Appointment of UAE Federal Tax Authority as the National Assessing Authority

6. 3.1 National Assessing Authority
• The UAE Federal Tax Authority (FTA) has been appointed as the National Assessing Authority for the purposes of the UAE ESR. In this capacity, the FTA will be primarily responsible for assessing whether a licencee has met the requirements of the Economic Substance Test and levying relevant penalties in cases of non-compliance.
• The Regulatory Authorities will continue to be responsible for the collection and verification of information regarding their licencees and shall assist the FTA in carrying out its role as the National Assessing Authority.

Part 4 – Amendments to Filing Requirements and Processes

• Moving forward, Notifications and ESR Reports shall only be filed via the Ministry of Finance Portal (once available).
• Notifications must be filed within six months from the licencees and/or Exempted licencee’s financial year end.

Part 5 – Clarification to Relevant Income definition

• Relevant Income remains defined as “all gross income from a Relevant Activity that is recorded in the books and records of the licencee under applicable accounting standards”.
• Gross income’ is clarified to mean all income from whatever source derived, including revenues from sales of inventory and properties, services, royalties, interest, premiums, dividends and any other amounts, without deducting any type of costs or expenditure.

To view the updated Relevant Activities Guide, please click here.

Please note that the Ministry of Finance website has been updated to include the latest documents and developments.