Economic Substance Regulation (ESR)
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Overview
The Organisation for Economic Co-operation and Development (OECD) has set guidelines to combat tax avoidance through tax base erosion and profit shifting. As a member of the OECD inclusive framework, UAE is committed to ensure that the UAE’s legal and commercial framework is in line with global standards. As a part of this commitment 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 Regulations (“ESR”) in April 2019.
These regulations are recently amended 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.
ESR is applicable to all licensees carrying out a ‘Relevant Activity’ in the UAE. This includes licensees in Free Zones, Financial Free Zones and Offshore Free Zones. The regulations apply to financial year commencing from 1 January 2019.
Licensees within the scope of ESR are required to submit notification and report confirming whether they undertake any Relevant Activity and meet the ESR tests.
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Law and Guidance
- 1. MoF interactive e-learning about Economic Substance and the Relevant Activities
- 2. New Cabinet Resolution No 57 of 2020 revoking Cabinet Resolution No 31 of 2019
- 3. Ministerial Decision 100 of 2020 ESR Guidance and Relevant Activities Guide Issued 19 August 2020
- 4. Economic Substance UAE Economic Substance Flowchart
- 5. MoF FAQs
- 6. Economic Substance Regulations filing portal
FAQ
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01
What are Economic Substance Regulation and the purpose for enacting them?
+ -The UAE introduced Economic Substance Regulation (ESR) on 30 April 2019 through a Cabinet of Ministers Resolution No. 31 of 2019.
This was done as a part of UAE’s commitment as a member of the OECD Inclusive Framework to implement the action points of OECD base erosion and profit shifting framework for countries across the globe with low or no corporate taxes where harmful tax practices such as tax avoidance and evasion are prevalent. UAE’s move to implement ESR also came in response to an assessment of the UAE’s tax framework by the European Union (EU) Code of Conduct Group on Business Taxation
The objective of this new regulation is to ensure that all legal entities in UAE have genuine substance in the region and are reporting actual profits generated from activities conducted in the region.
In consultation with the OECD and the EU, the Ministry of Finance (MoF) has made amendments to the Regulations and the revised Regulations were announced through Cabinet of Ministers Resolution No. 57 of 2020 signed on 10 August 2020 and updated Guidance was issued on 19 August 2020 (Ministerial Decision No.100 of 2020)
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Where can I find the ESR legislation and guidance?
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Where I can submit ESR notification and Report?
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04
Will the licenses be required to re-assess the applicability of ESR as per the amenged legislation?
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05
To who does the Economic Substance Regulations apply?
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What are Relevant Activities under ESR?
+ -The Relevant Activities under the Economic Substance Regulations are:
- Banking Businesses
- Insurance Businesses
- Investment Fund Management Businesses
- Lease-Finance Businesses
- Headquarters Businesses
- Shipping Businesses
- Holding Company Businesses
- Intellectual Property (IP) Businesses
- Distribution and Service Centre Businesses
It is important to note that there has been changes to the definition of Distribution and Service Centre Business and High Risk IP business.
Distribution and Service Centre Business :
The old definition of a ‘Distribution and Service Centre Business’ required the purchase of goods from a Foreign Connected Person, importing goods into UAE and subsequently reselling them outside UAE. This was amended to exclude the requirement to import and export goods from UAE. The new definition now only requires the purchase and resale of goods.
The definition of a Distribution and Service Centre Business has also been amended to exclude the requirement of the services to be in connection with a business outside UAE. Therefore, licensees providing any services to a Foreign Connected Person will now qualify as service center business.
High Risk IP Business:
The definition of a High Risk IP business has been narrowed. The condition relating to a licensee not carrying out any research and development, or branding, marketing and distribution as part of its core income-generating activity in the UAE has been removed in the new definition.
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07
Are the Relevant Activities same as the activities mentioned on Commercial licenses?
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What if a Licensee does not earn any income from the Relevant activity performed?
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Who is exempt from ESR?
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Are branches subject to ESR?
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