Economic Substance Regulations overhauled by UAE

The UAE has released revised legislation regarding ESR (Economic Substance Regulations). It was introduced in the previous year, 2019 as the 1st reportable year for all the Entities (branches, license holders, and companies) based in the UAE.

The overhaul of 2020 addresses certain features of the Economic Substance Regulations. The Entities based in UAE that are impacted by the ESR have taken note of all changes before the first report of ESR on the 31st of December 2020.

The ESR was introduced by UAE on 30th April 2019, via the Cabinet of Ministers Resolution No.31 of 2019. Particular guidance was followed up by the Ministry of Finance of UAE on 11th September 2019, which was through the ministerial decision 215 of 2019.

The Cabinet of Ministers adopted the Resolution No.57/2020, replacing and repealing the previous Resolution No. 31 of 2019. The new Resolution No.57/2020 was officially released on 2nd September 2020. Furthermore, on 19th August 2020, a renewed decision by the ministerial 100/2020 was published and made public in September. The changes in these resolutions are furthered explained below.

Alterations to the ESR:

The changes that have been made to the ESR through Resolution 57/2020 are being discussed below. A new list of exempted licensees has been introduced under the Economic Substance Regulations and includes; tax resident licensees under another jurisdiction, investment funds, and branches of entities that are liable to tax outside of the UAE’s borders. To fully use and enjoy the exempt status, exempted licensees have to give in documentary evidence that shows them under this status.

The Federal Tax Authority, FTA, is now the authority that can; assess the licensees and their economic substance tests, make decisions on the appeals presented by licensees and impose penalties for non-cooperation. The aforementioned powers that have been mentioned above used to belong to the relevant Free Zone Authorities and others.

The Resolution 57/2020 added to the administrative penalties with relevant amounts. If licensees fail to submit an ESR notification, the penalty they have to pay has been changed from US$2,725 to US$5,450. Moreover, the penalty for failing in the economic substance test has changed from the range of US$2,725 to US$13,625 to only US$13,625.

The Resolution 57/2020 has some changes like clarifying activities of a services business or distribution.

Reporting Mechanism of ESR:

Previously, the process of licensees submitting documents was through their regulatory authority. However, Decision 100/2020 explains that the Ministry of Finance will release a portal that will facilitate electronic registration of notifications and documents.

The recent changes will help businesses if they take action before the deadline, which is the 31st of December, 2020. These changes in the ESR will make it easier and more flexible for licensees to apply on time, with all the correct documents. A lot of emphasis has been placed on how relevant UAE authorities can help in these processes for efficient results. With the development of enforcement tools, the ESR may become stricter than before.