Understanding Exempted Licensees in the UAE’s ESR
To ensure compliance with the ESR (Economic Substance Regulation) requirements in the UAE, certain entities are exempted from the mandatory Economic Substance Test. These exemptions are available to entities classified as “Exempted Licensees” under the regulations. The term “Exempted Licensee” encompasses various types of entities registered in the UAE that are actively involved in Relevant Activities.
Investment Funds are specialized entities that primarily focus on issuing investment interests to raise funds or pool investor capital. Their main objective is to enable investors to benefit from the profits or gains generated by the Investment Fund’s investment activities, asset management, or asset disposition. This inclusive definition includes not only the Investment Fund itself but also any entities directly or indirectly involved in its investments, with the exception of the specific entities in which the fund ultimately invests.
Tax Residents within Other Countries
Entities that have tax residency in jurisdictions other than the UAE are excluded from the Economic Substance Test. To be eligible for this exemption, these entities must be subject to corporate taxation on all income arising from a Relevant Activity as a result of their tax residency in a jurisdiction other than the UAE. It is significant to highlight that the sole payment of withholding tax to a foreign jurisdiction does not serve as sufficient evidence to establish tax residency outside the UAE.
Entities entirely possessed by UAE Residents
Entities that are under full and beneficial ownership, whether through direct or indirect means, by UAE residents, are exempt from the Economic Substance Test under the following conditions:
- They do not belong to a Multinational Enterprise Group.
- All their operations are carried out solely within the boundaries of the UAE.
- The owners of the entity residing in the UAE must be UAE residents. The entity is required to refrain from engaging in any business activities beyond the borders of the UAE. Here, the term “UAE residents” pertains to individuals who are either UAE citizens or possess valid UAE residency permits and currently live in the UAE.
UAE Foreign Entity Branches with Taxable Income
The Economic Substance Test is not applicable to branches of foreign entities when their Relevant Income is already under the corporate taxation jurisdiction of the foreign entity’s tax residency.
Submission of Proof for Exempted Licensee Status
Entities claiming Exempted Licensee status should present substantial evidence to support their claim for each Financial Year during which they apply for this exemption. As an example, if a Licensee claims tax residency outside their home jurisdiction, they are required to provide any documents from the following list with their Notification for every relevant Financial Year:
- A document issued by the relevant authority in the foreign jurisdiction, certifying the corporate income tax residency status of the entity.
- Evidence like a corporate income tax evaluation, request, payment verification, or any pertinent record issued by the competent authority of the foreign jurisdiction, demonstrating the entity’s tax residency.
Utilize the Proficient Assistance of Leading ESR Consultants in the UAE
In the absence of adequate evidence to substantiate Exempted Licensee status, the entity will be classified as a standard Licensee under the ESR Regulations. This results in them being obligated to meet all requirements, which encompass the Economic Substance Test. To establish their exemption status and ensure compliance with the Economic Substance Regulations, Licensees are advised to engage the expertise of top ESR Consultants in the UAE.