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UAE issued Cabinet Resolution No 57 of 2020 (the “Amended ES Regulations”) on August 10, 2020, which repeals and replaces the original ES Regulations, along with updated guidance, which will clarify the amended ES Regulations (Ministerial Decision 100 of 2020 dated 19 August 2020). The amended ES Regulations apply from 1 January 2019. Major changes are highlighted below:
Definitions:
Definition of a “Licensee”- Natural persons, sole proprietors, trusts, and foundations are no longer in the scope of the ES regulations (these were considered as “Licensees” under the original ES Regulations). No need for these parties to file a notification or meet the Economic Substance Test. As “ branches” do not have separate legal personalities from their “parent” or “head office,” they are not regarded as “Licensees.”
Definition of a “Connected Person”-The amended ES Regulations define a Connected Person as an entity that is a part of the same Group as the Licensee or the Exempted Licensee.
Definition of a “Group” (new) -A Group is 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.
Gross income means all revenue from any source which is derived, without deducting any type of costs or expenditure.
Applicable exemptions
The amended ES Regulations introduce the following exemptions:
1) Entities that are tax resident outside the UAE
2) Investment Funds
3) Entities that are wholly owned by UAE residents and that are not part of a Multi-National Entreprise (MNE) group, and only carry out business activities in the UAE
4) UAE branches of a foreign head office / parent whose relevant income is subject to tax in the jurisdiction of the foreign head office / parent
Exempt entities must file a notification and provide sufficient documentary evidence ( such as tax residence certificate from foreign countries ) to substantiate and benefit from their exempt status.
Entities that are indirectly or indirectly owned (at least 51%) by the UAE government are no longer specifically exempted under the amended ES Regulations.
Changes to the definition of some “Relevant Activities.”
Distribution and Service Centre Business
The scope of the “Distribution and Service Centre Business” is changed such that:
There is no longer a requirement for the goods to be imported and stored in the UAE for an entity to be considered a “Distribution and Service Centre Business.”
There is no longer a requirement for services to be provided “in connection with a business outside the State,” resulting in any service provided to a foreign-related party to be considered a “Distribution and Service Centre Business.”
High-Risk Intellectual Property Licensee
The definition of a High-Risk Intellectual Property Licensee has been limited to intellectual property businesses that are acquired from a connected person and The business licenses 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.
Administration
The UAE Federal Tax Authority ( FTA ) has been appointed as the Assessing Authority for the ESRegulations. FTA will be accountable for assessing and enforcing all compliance of UAE businesses with the Economic Substance Test.
The responsibility of Regulatory Authorities’ will be mainly collection and verification of information regarding their Licensees and assisting the FTA in carrying out its role as National Assessing Authority.
Notification filings
The amended ES Regulations confirm that notifications must be filed electronically on the Ministry of Finance Portal within six (6) months of the Licensees financial year-end.
Businesses that have already submitted a notification to the Regulatory Authorities will be required to again submit their notification on the Ministry of Finance portal after it goes live. The guidance does not confirm a deadline for this resubmission.
To know more about which companies should be worried about the ES Regulations, read ESR- Which all Companies should be Worried?
Changes related to CIGA
A Licensee is not required to perform all the Core Income Generating Activities (also known as CIGAs) listed in the ES Regulations for a particular relevant activity in the UAE.
The board members (or equivalent) are not required to be resident in the UAE. However, the board members (or equivalent) are required to be physically present in the UAE when taking strategic decisions.
A Licensee may outsource activities that are not CIGAs to parties outside the UAE, such as back-office functions, IT, payroll, legal services, or other expert professional advice or specialist services provided.
Guidance on branches
UAE branch of a UAE business: The UAE business must file a single notification and Economic Substance.
UAE branches of a foreign business: The UAE branch is not subject to the ES Regulations if its relevant income is reported in the tax return of the foreign parent / head office.
A foreign branch of a UAE business: The UAE business does not need to report the relevant activities of its foreign branch, provided that the foreign branch is subject to tax on its relevant income in the foreign jurisdiction.
If you are looking to comprehend the implications of the amendments made in the ESRegulations, then Contact Us. The experts at JAXA Chartered Accountants will help you understand the importance of this amendment and will also provide you with the essential advice required by your company.
