The European Union has performed a review of the tax framework of the United Arab Emirates, and in the review, it was found by the European Union hat certain conditions were not met. This led to the EU adding the UAE to the list of Non-Cooperative jurisdictions for tax purposes, which is also known as the EU Blacklist. As the United Arab Emirates was also a member of the OECS Inclusive Framework for BEPS, and to remove its name from the blacklist, Economic Substance Regulations or ESR was introduced and implemented in the country.
Which Activities are under the Radar?
The newly introduced Economic Substance Regulations (ESR) is applicable to Companies doing relevant activity only. However, some regulatory authorities like DMCC, DAFZA, DWC, etc. has asked all companies to declare whether they are doing the relevant activities or not. As per the Cabinet Resolution No. 31 issued on April 30, 2019, the following are the relevant activities:
1. Banking Businesses,
2. Insurance Businesses,
3. Investment Fund Management Businesses,
4. Headquarters Businesses,
5. Holding Company Businesses,
6. Shipping Businesses,
7. Lease Finance Businesses,
8. Intellectual Property Businesses
9. Distribution and Service Centre Businesses.
To know whether you are doing an activity or not, ‘substance over form’ approach should be followed, i.e., if you undertake any of these activities irrespective of whether it is stated in the commercial license or registration certificate, it will be considered that you are doing a relevant activity. While activities 1 to 6 are applicable to those companies who are engaged in that particular business only as these cannot be carried out in UAE without a specific license, the last 3 may be applicable for many companies. A trading company that has given loans with interest to other parties, including staff, will be considered as doing financing activity.
Similarly, a company, who own brand name, patent, trademark, etc. and earn separately identifiable income like royalty, franchise fees, etc. will be considered as doing intellectual Property (IP) business, even though this is not its main activity. It should be noted that simply holding a registered patent, etc. just to promote own sales will not constitute IP business. Distribution and service center business may be applicable to many MNC companies who buy goods from their group companies outside UAE and sells it anywhere in the world and those who provide services to their group companies outside UAE.
To summarize, the majority of the in the UAE
- Who do not have group companies outside the UAE and
- Who do not have any interest in earning loans and
- Who do not own intellectual properties from which income like royalty, franchise fees, etc. are received
These companies need not worry about the Economic Substance Regulations. But the companies who do relevant activity will have to do an economic substance test and prove economic substance in UAE within the given time frame. If they fail to do so, UAE authorities can share the information with the foreign competent authority and also fine ranging from AED 50000 to 300,000 may be levied.
What should be Disclosed in the Economic Substance Notification?
The management of a company should be very cautious while filing an Economic Substance Notification. It is mandatory for all the licensees to file an Economic Substance Notification on an annual basis. This notification should consist of the following information:
- The date of the financial year ending for the business.
- If the activity conducted by the business falls under the category of “Relevant Activities.”
- If the licensee has earned any income generated by conducting the “Relevant Activities.”
- If the income generated by “Relevant Activities” are subject to tax either partially or fully outside the United Arab Emirates.
- If the Licensee is exempt from the Economic Substance Regulations due to Government Ownership
Economic Substance Regulations are a new addition to the regulations which every company in the UAE has to take care of. As it is an annual affair, all companies must prepare the notification and, in some cases, the complete report on an annual basis. As there is not much clarity amongst the business class, it is recommended that you should take the assistance of a business consultancy which will guide you through it.
If you are looking for a business consultancy in the United Arab Emirates which will understand your business and produce an Economic Substance Notification accordingly, then you must avail the services of JAXA Chartered Accountants. The experts at JAXA will not only help you to create the ESR notification but will also help in generating the final report. They also provide various other financial services which can be required by a budding business. For more details on the various services, Contact Us . We will be happy to provide an answer to all of your queries.