Recognizing Exempt Licensees in the ESR of the United Arab Emirates

Under the ESR (Economic Substance Regulation) conditions in the United Arab Emirates some entities obtain exemptions which let them avoid performing the compulsory Economic Substance Test. Under the regulations, these exemptions are accessible for organizations classified as “Exempted Licensees.” The term “Exempted Licensee” refers to multiple types of businesses operating in the UAE that actively conduct Relevant Activities.

Pooled Funds   

Specialized Investment Fund’s main purpose consists of issuing financial interests to collect funds from investors and combine their capital within a single entity. The Investment Fund exists to let investors benefit from profitable outcomes derived from managing investments and disposed assets. The definition of “Investment Fund” is expanded to include all participating and associated entities that make investments, except for the final investment target entities.

Foreign Tax Residents

Any business with non-United Arab Emirates tax residency automatically falls outside the Economic Substance Test boundaries. These entities qualify for the exemption when they pay corporate taxes on all Relevant Activity income stemming from their tax residency in places outside the UAE. Tax residency outside the UAE cannot be validated by paying withholding tax abroad.

Businesses fully owned by UAE residents

The Economic Substance Test does not apply to entities under the full ownership of UAE residents through either direct or indirect methods under the following circumstances:

• They are not affiliated with any Multinational Enterprise Group.
• All business operations of such entities stay confined to the UAE territory.
• All owners of entities based in the UAE need to reside locally as UAE citizens. Business operations of the entity must be limited to the geographical area of the United Arab Emirates.

Branches of foreign entities in the UAE with taxable income

The Economic Substance Test does not apply to foreign entity branches when their Relevant Income falls under corporate taxation rules of their tax resident jurisdiction.

Providing evidence for exempted licensee status

Companies requesting Exempted Licensee status need to provide strong evidence about their exemption claims for each financial period during which they apply for this waiver. Residents have to present proof of their foreign residency status to claim tax benefits annually.

• A certified document issued by the ruling authority in the overseas jurisdiction, confirms the corporate income tax residency of the entity.
• Proof of tax residency must include corporate income tax evaluations combined with requests, payment verifications and other relevant documents from the foreign jurisdiction authority.

Leverage the expertise of top ESR consultants in the UAE

A lack of sufficient evidence regarding Exempted Licensee status will result in a standard Licensee classification under the ESR Regulations. The procedure requires them to fulfill every requirement set forth by the Economic Substance Test. Businesses should seek assistance from the best ESR Consultants operating in the UAE in order to validate their exemption status and follow Economic Substance Regulations.