Economic Substance Regulation (ESR) Advisory

On 10 August 2020 the UAE Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020 and Ministerial Decision No.100 of 2020 which replaces Cabinet Resolution No.31 of 2019. The amended ES Regulations apply from 1 January 2019 and introduce important changes to the scope and application of the UAE economic substance regime. The UAE Minister of Finance also issued updated guidance on 19 August 2020, clarifying certain aspects of the amended ES Regulations.

The Revised ESR and Revised Guidance have amended/ included the   following

Definition of a “Licensee”

  • As per revised ESR, Guidance “Licensee” includes
  1. A juridical person 
  2. An Unincorporated partnership registered in the State, including free zone and financial free zone and carries on a relevant activity in the UAE.
  • Persons excluded from ESR applicability

Natural Persons, sole proprietorship, trust and a foundation will not be treated as licensees for the purpose of ESR and therefore do not need to file a notification or meet the Economic Substance Test.

  • Revised ESR and Guidance has provided clarity on transactions between HO and Foreign branches.
  1. Branches are not to be considered as a separate legal entity from their “parent” or “head office” & such branches are not required to file separate notification or report.
  2. The UAE Branch of a foreign entity carrying out a relevant activity is not required to comply with ESR, if income is reported in the tax return of the foreign parent entity outside UAE.
  3. Income of a foreign branch of the UAE business is not required to report the relevant activities of its foreign branch, if income of foreign branch is taxed outside the UAE.

Exempted Licenses

The earlier Regulations exempted licensees which are directly or indirectly owned at least 51% by the UAE Government, Such licensees were only required to file Notification with respective Regulatory Authorities but now these entities are no longer specifically exempted under the amended ES Regulations.

Revised ESR introduces the following exemptions:

  1. An entity that is tax resident outside the UAE.
  2. Investment Funds
  3. An entity wholly owned by UAE residents and
  4. (i) Entities are not part of a multinational group, and
  5. (ii) All activities of business are carried out only in the UAE.
  6. UAE branches of a foreign entity whose relevant income is taxable outside the UAE.

An Exempted entity must

(i) file a notification and

(ii) provide sufficient documentary evidence to substantiate the exemption status.