A review of the tax framework of the UAE was done by the European Union, and some of the criteria were to meet by the UAE, which led to the addition of the country to the EU list of Non-Cooperative jurisdictions for Tax Purposes, also known as the EU Blacklist. This, along with the fact that UAE is a member of the OEC Inclusive Framework for BEPS led to the introduction and implementation of the Economic Substance Regulation (ESR) in the country.
The implementation of Economic Substance Regulations has affected all the business no matter the size. In order to remove any confusion regarding this matter, the Ministry Of Finance (MoF) has also released a flowchart which depicts the timeline as to when should a business entity provide notification and when should it file a report with the concerned authorities.
What is Economic Substance Regulations?
Economic Substance Regulation or ESR is a guideline that has been introduced on the 30th of April 2019 via Cabinet Minister Resolution No. 31 of 2019. This resolution will be applicable to businesses that are domestic as well as international. The compliance requirements can be divided into 3 steps as mentioned below.
- Submit the notification which states that the business conducts the “Relevant Activities” which needs to be submitted before 30 June 2020.
- If your answer to the previous question is yes, then the business must test if the required criteria are met or not. The criteria to be fulfilled have been mentioned in the resolution and guides issued by MoF.
- Also the Companies doing “Relevant Activities” must submit Economic Substance Return to the concerned Authority before December 31, 2020 or within 12 months from the financial year, whichever is later.
All the companies must perform Step No. 1, and most of the companies will have the answer as “NO”. These companies will no more require to follow the above-mentioned steps. The business entities which do perform the relevant activities must perform the next two steps. The Regulations apply to financial years which will commence on or from 1st January 2019. The current reporting requirements relating to the activities carried out during the financial year that started after January 1, 2019.
What are Relevant Activities?
A list of the relevant activities has been provided below. There are nine (9) relevant activities which if performed, must be notified to the relevant authority. These activities are:
- Insurance Business
- Investment Fund Management Business
- Banking Business
- Headquarters Business
- Lease and Finance Business
- Distribution and Service Centre Business
- Intellectual Property (IP) Business
- Shipping Business
- Holding Company Business
After the identification of the “Relevant Activities” performed by the UAE company, according to the Economic Substance Regulations, the business entity must conduct an Economic Substance test which will consist of the following three elements:
- The business entity is managed and directed in the United Arab Emirates in relation to the “Relevant Activity”.
- The business entity conducts the Core Income Generating Activity (also known as CIGA) is conducted in the United Arab Emirates.
- The business entity meets the specified criteria in relation to the “Relevant Activity” which is carried on in the United Arab Emirates.
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 the company has to take care of. Since this is an annual affair, a company has to prepare the notification and in some cases the complete report annually. 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 answer all your queries.