A. The Economic Substance Regulations (ESR)
1. What is the reason behind the UAE implementing ESR?
In response to the evaluation of United Arab Emirates – UAE taxation framework conducted by EU’s Group with guidelines for Business Taxation best practices, the UAE implemented Resolution 31 in April 2019. This resolution is a testament to the United Arab Emirates’ commitment and determination as a OECD Framework member.
On August 10, 2020, the United Arab Emirates Cabinet enacted Resolution Number 57, focusing on regulations relating to economic substance. This resolution introduced revisions and repeals to several earlier resolutions, including Resolution Number 31 and another resolution identified as Cabinet Resolution No. 58 in 2019, along with Cabinet Resolution No. 7 in 2020. As a consequence, the ministry issued fresh guidelines through Decision Number 100, which includes a revised list of activities deemed relevant, listed in Schedule 1.
One of the main goals of these regulations is to guarantee accurate profit reporting by businesses operating within the boundaries of the UAE, reflecting their economic activities within the country. To achieve compliance, companies operating in various regions, including onshore, free zones, and other specified business structures involved in specific activities (known as Licensees, please see Question 6), must establish and visibly showcase economic existence that aligns with their operational activities.
The joint effort between the Organisation for Economic Cooperation & Development (OECD) and the European Union (EU) resulted in the establishment of regulatory provisions, which encompass Ministerial Decision 100 and Resolution 57. These two documents work collectively to provide a comprehensive framework.
2. What is the importance of a business adhering to Economic Substance requirements?
Businesses that fall within the purview of the Economic Substance Regulations (refer to Section B) are required to fulfill three obligations, namely, submitting a Notification, the Report, and successfully meeting the requirements of the Economic Substance Test (EST). Neglecting these obligations may result in penalties (refer to Question 71).
3. When does the effectiveness of the Regulations commence?
The scope of Regulations encompasses fiscal years starting from January 1, 2019, onwards.
First Example: For instance, if a company of UAE has a financial year that starts on January 1, 2019, and concludes on December 31, 2019:
The initial evaluation period would span from January 1, 2019, to December 31, 2019.
Second Example: For a company of UAE with a financial year running from April 1, 2019, to March 31, 2020:
The initial evaluation timeframe for this company would be from April 1, 2019, to March 31, 2020. It is important to note that compliance with Regulations is not mandatory during the period between January 1, 2019, and March 31, 2019.
Third Example: If a company of UAE has a financial year from July 1, 2018, to June 30, 2019:
The initial evaluation period for this would extend from July 1, 2019, to June 30, 2020.
During the period between July 1, 2018, and June 30, 2019, compliance with Regulations is not necessary.
4. Which entities are considered as Regulatory Authorities?
The responsibility for overseeing and administering the Regulations lies with the Regulatory Authorities designated in Article 4. Here is a brief overview of these Authorities:
A. Federal Institutions:
• Department of Economy
• Central Bank
• Central Bank’s Insurance Division
• Authority for Securities and Commodities
B. Free Zones in Abu Dhabi:
• Global Market of Abu Dhabi
• Free Zone for Abu Dhabi Airports
• Ports of Abu Dhabi
• MASDAR City
C. Free Zones in Dubai:
• Dubai Airport Free Zone
• Authority of Dubai Healthcare City
• Dubai International Financial Center
• Dubai Aviation City Corporation/ Dubai South
• Authority of Jebel Ali Free Zone
• Dubai Global Trade Centre
• International Humanitarian City
• Dubai Development Authority
• Dubai Silicon Oasis
• Dubai Multi Commodities Centre
• Dubai Maritime City
D. Free Zones in Sharjah:
• Authority of Sharjah International Airport Free Zone
• Authority of Hamriyah Free Zone
• Sharjah Media City (Shams)
• Sharjah Publishing City
• Innovation, Research, and Technology Park of Sharjah
• Sharjah Healthcare City
E. Free Zones in Ajman:
• Authority of Ajman Free Zone
• Authority for Ajman Media Free Zone
F. Free Zones in Ras Al-Khaimah:
• RAK International Corporate Centre
• Ras Al Khaimah Economic Zone
• RAK Maritime City
G. Free Zones in Um Al-Quwain:
• Free Trade Zone of UAQ
H. Free Zones in Fujairah:
• Fujairah Free Zone
• Authority of International Free Zone
• Fujairah Creative City
It is the role of the relevant Regulatory Authorities to guarantee that the notification and reporting requirements established in the Regulations are duly followed. They are in charge of various duties such as identifying prospective Licensees, verifying submitted information, assessing eligibility for exemptions, and collaborating with the tax authority and the UAE Ministry of Finance in exchanging essential information.
5. What does the term 'National Assessing Authority' mean, and what are its primary roles and responsibilities?
According to the implementing Regulations, the Authority is responsible for evaluating and ascertaining the economic substance of Licensees conducting business activities within UAE is the FTA.
Additionally, the authority is responsible for ensuring that UAE businesses comply with the Economic Substance Regulations (ESR). This involves enforcing penalties for any instances of non-compliance and managing the appeals process.
To find comprehensive information about penalties and the appeals process related to the aforementioned Regulations, please visit the dedicated Economic Substance webpage on the Authority’s website. You can access it by clicking [here] (link to Authority’s ESR page).
B. Applicability Scope
6. To whom does the application of Regulations apply?
Licensees engaged in the listed Relevant Activities are subject to the Regulations.
• Banking Businesses
• Insurance Businesses
• Businesses managing investment funds
• Businesses engaged in Lease-Financing
• Headquarter Businesses
• Shipping Businesses
• Businesses under a holding company
• IP Businesses
• Service center and Distribution Businesses
For detailed explanations and instances of each activity, you may wish to refer to the first schedule mentioned in Ministerial Decision Number 100.
7. What is the definition of the term Licensee?
In the context of the document, the term “Licensee” pertains to a registered legal entity or a partnership without incorporation that conducts an activity deemed relevant within the UAE.
For instance, Licensee may encompass:
• A company with limited liability
• A privately held shareholding company
• A publicly held shareholding company
• A collaborative venture company
• In the document’s context, the term “Licensee” includes partnerships (like limited liability partnerships, limited partnerships, general partnerships, etc.)
The individuals listed below are not regarded as “Licensees” according to the implementing Regulations:
• An individual
• A business owned by a single individual
• A Trust*
• A Foundation*
Normally, Trusts and Foundations are prohibited from engaging in commercial activities, which includes conducting a “Relevant Activity.” Nonetheless, if a Trust or Foundation does partake in a “Relevant Activity,” it will be classified as a Licensee and must adhere to the Regulations.
8. In the event that my business operations fail to satisfy the requirements of any of the enumerated Relevant Activities, will it still be necessary for me to observe the ESR?
No, the ESR apply only to companies that are involved in an Activity classified as relevant by the aforementioned regulations. These companies are required to file a Notification and submit an ES Report.
9. Are branches included within the ambit of Regulations?
Branches registered within UAE are considered to be part of their “head office” or “parent” and lack independent legal status.
The responsibility for submitting a comprehensive Licensee filing, consolidating the pertinent activities of both the UAE-registered “head office” or “parent” and their branches, lies with the “head office” or “parent.” This submission must encompass the mandatory “Notification” as well as the “ESR” if applicable.
For a foreign entity’s branch operating within the UAE within a pertinent Activity, adherence to the Regulations is crucial. However, there is an exception if the branch’s Relevant Income is subject to the tax jurisdiction of its foreign head office/parent. The requirement of being subject to or falling under the scope of tax is fulfilled when the income generated by a branch operating within the boundaries of the UAE is included in the calculation of taxable income by the foreign head office / parent or any other related group entity for taxation purposes. This rule remains applicable regardless of whether branch income within the UAE qualifies for exemptions or other forms of tax benefits in the jurisdiction outside the UAE. This is determined by the local tax laws or a bilateral tax agreement in place.
In cases where a company registered within the UAE conducts a specific business activity or operation through an overseas located branch, the Regulations do not require the consolidation of operations and earnings of the overseas branch. This exception is applicable when the income generated by the branch operating in foreign jurisdiction is liable to be taxed in the jurisdiction where it is operating. In such circumstances, the branch can be considered as part of the company for corporate taxation purposes, without being regarded as an entity having separate legal status.
10. To whom should I provide the information pertaining to my branch?
When you fill out the Notification and the report on the Economic Substance Filing Portal, you have the choice to provide information about your branches that are engaged in any Activity that are relevant in context of the ESR and within the Section B of each form.
11. Will the Regulatory Authorities notify businesses if they must comply with the Regulations?
No, it is the duty of businesses to autonomously assess whether they are engaged in any activity that is considered relevant in light of the ESR and have a requirement to file under the said Regulations. They should not depend on the Authorities to inform them about their obligations under these regulations.
12. What is required to be included within the scope of Regulations?
For more comprehensive details, please consult the segment K – Administration’.
License holders engaged in a pertinent Activity must submit a yearly notification, ensuring it is done within a period of 6 months after the conclusion of their respective financial period.
Additionally, Licensees earning income from Relevant Activities must provide a report on Economic Substance no later than 12 months after the conclusion of the applicable fiscal year.
Showing evidence of substance
In every fiscal year where a Licensee derives earnings linked to a pertinent Activity, they must meet the requirements of the Economic Substance Assessment applicable to that business operation.
The test for economic substance requires that a Licensee must showcase the following:
• The Relevant Activity and Licensee are effectively overseen and controlled within UAE.
• The necessary CIGAs are performed within UAE.
• The Licensee maintains a sufficient presence of personnel, expenses, and premises within UAE.
13. Are the Regulations specifically targeted at multinational groups based overseas, with affiliations in the UAE?
The Regulations not only impose obligations on entities operating within the United Arab Emirates that are affiliated with a multinational group operating abroad, but also require any company operating within the country and engaged in a qualifying business activity to comply with the economic substance requirements.
Nonetheless, a company engaged in Distribution, Headquarters, Service Center, or activities with a High-Risk intellectual property in the country falls under the Regulations solely when it engages in transactions with foreign companies. The Regulations do not cover transactions between UAE entities in Service Center, Headquarters, Distribution, or High-Risk intellectual property activities.
14. Are companies registered within an offshore free zone entity framework included within the scope of the Regulations?
Certainly, if an “offshore” company engages in pertinent Activity, it is required to comply with the Regulations.
15. Is it necessary for the company to file a Notification if the Ultimate Beneficial Owner (UBO) of the Licensee is an individual who is either a UAE national or resident?
It is true that a business that is engaged in a Relevant Activity is required to file a Notification, regardless of the nationality or residency status of its direct or ultimate owners.
16. Are the activities mentioned in the license (commercial one) the deciding factor in establishing if a Licensee is involved in a Pertinent Activity?
No, depending solely on the activity description found in a commercial license is inadequate for assessing if a Licensee is engaged in activities considered Relevant and falls under the purview of these Regulations. Adopting an approach of considering substance over any legal form is crucial, which involves evaluating the actual activities performed during the fiscal period, in addition to the information provided in the license (commercial).
Irrespective of the activities mentioned on the license (commercial), a business is obliged to comply with the Regulations if it engages in a Relevant Activity.
17. When does a Licensee need to determine if it is engaged in an activity that falls under the classification of Relevant?
The evaluation of whether a Licensee is participating in a pertinent activity must be conducted during every fiscal period.
18. What steps should be taken by a Licensee to ascertain its financial period in order to meet the Economic Substance requirements?
The financial period that a Licensee must consider for Economic Substance obligations usually aligns with the period for which they prepare their financial statements (if they prepare any). To determine this period, the Licensee should consider their accounting practices and the duration covered by their financial statements. Accurately identifying the financial period is crucial for Licensees because it forms the foundation for assessing and reporting their compliance with Economic Substance requirements during that specific timeframe. Aligning the financial period with financial statements promotes consistency and facilitates the fulfillment of regulatory obligations.
New Licensees that have just established their company may face either a short or a prolonged initial financial period. For more information and examples about this, refer to the Economic Substance Notification and Report guidelines.
19. Who has no obligations to comply with the Regulations?
Licensees falling under the “Exempted” category listed below are not required to submit a report on Economic Substance or demonstrate their substance within the boundaries of the UAE:
• Licensees with their tax residency outside the UAE.
• Investment funds, including related special purpose vehicles (SPVs) or investment subsidiaries, are encompassed within this category.
• Entities that are fully owned by UAE residents, conduct their operations exclusively within the country, and have no connection or association with any multinational group.
• Branches of foreign entities that are subject to taxation on all their Relevant Income outside the UAE.
To apply for exemptions, it is crucial to provide the relevant documentation in addition to the form of Notification. For a comprehensive understanding of the required supporting paperwork, please check the Notification guide.
20. In the event that a Licensee is not involved in any activities classified as relevant throughout a specific financial period, what course of action should they take?
A Licensee not engaged in any activities classified as relevant for a particular financial period is exempted from the test of economic substance.
As a result, during that specific financial period, the Licensee is not obligated to file a Notification (refer to Question 60) or provide evidence of economic substance (refer to Question 65). The Licensee is exempt from these requirements.
21. When my newly formed business engages in or plans to engage in an activity considered relevant, what is the appropriate timing for submitting a filing?
• Notifications must be submitted within six months from the conclusion of the financial period in which an activity (if relevant) was performed.
• The Reports need to be submitted within one year from the end of the financial period in which a activity (if relevant) was carried out.
If your business is newly formed and did not conduct any Relevant Activity during the initial financial period, the regulations do not apply to your situation.
22. Do I need to file a Notification now if I am not currently involved in any Relevant Activity but anticipate doing so in 6 or 10 months?
No, it is advisable to wait until the end of your financial period to assess whether you have carried out an activity that is considered to be relevant. If you have conducted a Relevant Activity, you should submit a Notification for the corresponding Reportable Period. Notifications must be filed with the relevant authority within six months after the relevant Fiscal Year end, while Economic Substance (ES) Reports should be submitted within twelve months after the conclusion of the relevant financial period.
23. What are the implications if a Licensee is engaged in an activity considered Relevant for only a partial duration within a financial period?
Even if a Licensee participates in an activity considered Relevant for only a portion of their financial period, they are still obligated to file a Notification and, if applicable, submit a report on economic substance that encompasses the entire financial period.
In the event that the Licensee is involved in multiple Relevant Activities throughout the financial period, they must include all of these activities in a single Notification and, if applicable, a Report with regards to Economic Substance must be submitted.
24. Is a Licensee required to file a Notification and submit Economic Substance (ES) Report annually until liquidation, even if they were previously engaged in a Relevant Activity but have since discontinued it?
The Licensee is not required to submit or file a Notification and ES Report every year until liquidation. Instead, they are only required to file for the financial periods during which they conducted Relevant Activity. It’s possible that the Licensee is obligated to file in one year but not the subsequent year, depending on their activities.
25. If a Licensee is involved in an activity considered relevant but does not generate any income from it throughout a financial period, what happens?
Even if a Licensee does not generate any income from an activity classified as relevant during a financial period, they are still required to file a Notification using the designated filing platform provided by the MoF.
During that specific period, the Licensee is exempt from submitting a report on Economic Substance.
26. Does the applicability of the ESR depend on a specific minimum income level?
No, there is no minimum income threshold or requirement. If you are engaged in a Activity (if relevant), you must fulfill the obligation of submitting a Notification.
To be clear, if you generate any revenue from an activity considered to be relevant, even as little as a single dirham, you must file a report on Economic Substance and demonstrate economic substance. However, there are exemptions available if you meet certain criteria.
27. Should all income derived from an activity classified as relevant be earned outside of the UAE, will the Licensee be exempted from complying with the Regulations?
The Licensee cannot be exempted from complying with the Regulations for income generated from activities deemed Relevant. They are required to showcase economic substance, even if the income is earned outside the country by Licensee.
For detailed information on how a UAE entity’s overseas branch earning income from activities considered Relevant is treated, kindly consult Question 9 for specific clarification.
28. Do they still have an obligation to adhere to the rules and regulations if they are undergoing liquidation or have ceased to exist for any other reason?
Yes, the Licensee must comply with the Regulations for any financial period where they are involved in activities classified as relevant. This includes submitting a Notification and, if necessary, a Report as well.
29. If the Licensee undergoes a change in its legal form for a previous Reportable Period, what steps are needed to be taken?
The Licensee is required to report the information based on the legal form that was in effect at the end of the respective Reportable Period. In simpler terms, the Licensee should report using the legal form that was applicable at the conclusion of that specific Reportable Period.
C. Illustrating Economic Substance within the UAE
30. Which criteria are used to determine what constitutes appropriate or adequate compliance with the economic substance requirements?
The UAE recognizes that businesses differ in nature and size and understands that the definition of “appropriate” and “adequate” economic substance may differ depending on the type of activities performed by the Licensee and the income generated. As a result, the Regulations do not establish a specific “minimum” criteria for determining what meets the standards of “appropriate” or “adequate” economic substance.
In the process of evaluating a Licensee’s compliance with the EST, the tax authority is anticipated to adopt a practical approach, considering the dynamic nature of the Licensee’s activities and their engagement throughout each fiscal period and across consecutive years.
31. Is the assessment of economic substance conducted collectively for Licensees belonging to a common group, or is it evaluated separately for each Licensee?
As per the provisions of the Regulations, evaluating Licensees within a common corporate structure is not feasible for determining economic substance. Consequently, each Licensee must comply with all the applicable Regulations individually as well as display economic substance. However, if applicable economic substance (related to staff, assets, functions, etc.) is present within the boundaries of the UAE for other group firms, it can be considered for the Licensee if it can be made available through a service or outsourcing agreement (see Question 37 for more information).
32. Are Licensees obligated to conduct board meetings within the boundaries of the UAE?
Indeed! It is mandatory for Licensees to organize a satisfactory amount of meetings (or their relevant substitute) within the boundaries of UAE. The frequency of these gatherings varies, depending on the type of Relevant Activity that the Licensee engages in. To ensure that the Licensee adheres to the prescribed regulations, the subsequent conditions must be fulfilled for every meeting hosted in UAE:
• In order to meet the quorum requirements, it is necessary for a satisfactory number of directors to be present within the physical boundaries of UAE.
• The minutes of the meetings need to be accurately documented and signed within the boundaries of the UAE.
• The directors who participate in the meeting must possess the necessary expertise and skills to effectively carry out fiduciary duties.
It is important to note that, in the case of a business operating as a holding company, there is no obligation to run and oversee it within the territorial boundaries of the UAE, unless explicitly stipulated by the relevant authority responsible for issuing licenses.
33. Is it mandatory for individuals engaged in Core Income Generating Activities (CIGAs) to be residents of the UAE?
Usually, employees involved in Core Income-Generating Activities (CIGAs) for a Licensee are expected to be residents of the UAE. However, there are instances where individuals from outside the United Arab Emirates or other personnel can also assist in meeting the substance requirements for the Licensee within the UAE. This is feasible when these individuals physically carry out the necessary activities within the country while being directly supervised by the Licensee. Additionally, the Licensee is responsible for covering the expenses related to these individuals.
34. Is it required for the Licensee's directors to be residents of the UAE?
The Licensee’s directors are not mandated to be residents of the UAE. Nonetheless, their physical presence in the UAE is necessary to participate in crucial meetings held by the Licensee’s board.
35. Is it possible to categorize directors as part of the employee classification?
Yes, if directors engage in CIGAs alongside their fiduciary responsibilities, they may be deemed as part of the Licensee’s workforce, thereby meeting the requirements of the test for economic substance.
36. Can possessing a tax residency document in the UAE for the financial year be considered as evidence that the requirements of the test for economic substance have been met for that period?
No, even though obtaining a certificate of tax residency within the UAE requires meeting the minimum presence criteria in the country, the certificate itself does not provide enough evidence to demonstrate that a Licensee has the required economic substance within the UAE concerning their Relevant Activity as well as associated earnings.
D. Illustrating Economic Substance through Outsourcing in the UAE
37. Which activities are eligible for outsourcing by a Licensee?
The Licensee has the option to outsource a part or the entirety of its Core Income Generating Activities (CIGAs) within the UAE. However, this is subject to the condition that the activities contracted to external parties remain confined within the country’s borders. This enables the Licensee to utilize resources such as facilities and third-party employees from affiliated entities based in the UAE, thereby ensuring compliance with the requirements of the test for Economic Substance.
Please keep in mind that the element of “managed and directed” cannot be delegated to external parties through outsourcing. It remains the responsibility of the Licensee to showcase supervision and control over their Relevant Activity within the UAE.
38. Which entities or parties are eligible for a Licensee to delegate its outsourced tasks?
Licensees can choose to delegate or contract out Core Income Generating Activities (CIGAs) to external service providers or affiliated entities. Nevertheless, it is crucial for Licensees to maintain oversight and retain control over the activities that have been outsourced.
39. What procedures does a Licensee need to follow when engaging in an arrangement for outsourcing activities?
The Licensee is expected to:
• Ensure adequate oversight of the delegated activity.
• Verify that the delegated activity takes place within the UAE borders.
• Verify that the provider of outsourcing has the necessary presence in the UAE.
• Ensure that the resources of the provider of delegated services are not duplicated.
These requirements can be fulfilled by establishing formal contracts that delineate the association and obligations between all parties involved, alongside maintaining regular communication with the provider engaged in the outsourcing.
40. Is it permissible for a Licensee in the UAE to delegate some of its tasks to an individual or organization located outside of the country?
When non-core income generating activities (CIGA), such as back-office tasks or specialized guidance that cannot be performed locally, are outsourced to affiliated entities or external service providers located outside of the UAE, it does not impact the Licensee’s economic substance within the UAE.
E. Business of Distribution and Service Centers
41. What is the definition of the term Service Centre and Distribution Business?
Within the category of “Relevant Activity,” the term “Service Centre and Distribution” Business covers two separate and distinct activities.
When an entity in the UAE satisfies the given criteria, it falls under the category of “Distribution Business.”
• Engages in procuring goods from an overseas affiliated entity; and.
• Dispenses the acquired goods
An entity operating in the UAE falls under the category of a business involving service centers when it:
• Offers services to an overseas affiliated entity.
However, licensees primarily involved in activities such as Insurance, Banking, Lease-Finance, Headquarter Business, Intellectual Property, Shipping, or Management of Investment Fund, who also provide services or procure goods for affiliated entities abroad in the course of their operations, are not categorized as engaging in a Service Centre and Distribution Business. This exception avoids the necessity for redundant reporting from these licensees.
Entities in the United Arab Emirates that exclusively acquire goods from external parties or provide services solely to external parties are exempt from the Regulations governing Service Center and Distribution Businesses.
42. If a business acquires goods from an international group entity and then proceeds to sell them, whether in the United Arab Emirates or to customers outside the country, while ensuring that the delivery of goods is directly handled by the international group entity to the final recipients, would it be classified as a Service Centre and Distribution Business?
Certainly, the revised description of a Service Centre and Distribution Business is applicable in these scenarios since it no longer mandates the importation of goods into the UAE. Consequently, transactions involving the ‘bill-to-ship’ model can now be categorized as falling under the Regulations governing Service Centre and Distribution Businesses.
Additionally, under the updated regulations, there is no longer any obligation for the subsequent international sale of goods. As a result, the local handling and delivery of goods procured from an overseas group company are now covered by the regulations governing Service Centre and Distribution Businesses.
F. Holding Company Business
43. What does the term business of Holding Company refer to?
To be categorized as engaged in the business of Holding Company in the United Arab Emirates, the entity needs to meet the following criteria:
• It exclusively holds ownership stake(s) in legal entities; and.
• The entity exclusively derives its income from capital gains and dividends obtained through its ownership stake(s).
If a company in the United Arab Emirates possesses assets or generates income that is not obtained from dividends and capital gains, it does not qualify as business of Holding Company. However, if the ownership of these additional assets or involvement in different business endeavors falls under a different category known as “Relevant Activity,” such as the business of lease-finance, the company will be governed by the Regulations that are specifically applicable to that particular Relevant Activity.
44. Do the Regulations classify investment funds as Holding Company Businesses?
According to the rules and regulations, investment funds are not considered Holding Company Businesses.
45. Is it necessary for a business of Holding Company to prove economic substance?
While it’s true that the business of Holding Company must demonstrate economic substance, the substance requirements for this type of business are relatively less stringent than for others. The specific substance requirements are outlined below:
• The Licensee must comply with the reporting and compliance obligations specified in the applicable regulations.
• Ensure that there is a sufficient workforce as well as physical resources (such as premises).
There is no requirement for a company operating as Holding Company to:
• The requirement to have its “management and direction” based within the country is subject to the rules and regulations of every Regulatory Authority.
• Possess or demonstrate sufficient expenditure within the UAE.
G. “High-Risk” Intellectual Property (IP) Business
46. What criteria must an Intellectual Property (IP) Business fulfill to be classified under the category of High Risk?
An Intellectual Property (IP) Business is deemed “High Risk” if it meets all the below mentioned conditions:
1) The Intellectual Property (IP) asset possessed by the Licensee was not developed for its business purposes.
2) An Intellectual Property (IP) asset was obtained by the Licensee either from:
• an individual with connections, or
• Development and funding research by an individual situated outside of the UAE.
• The Licensee grants permission for the Intellectual Property asset to be licensed to multiple affiliated parties.
• Generates income through activities carried out by foreign affiliated individuals.
47. When a Licensee is engaged in an Intellectual Property (IP) Business classified as High Risk, what does this signify?
1) The information regarding the Licensee is automatically disclosed to the foreign regulatory authority overseeing the beneficial owner, the holding company and the ultimate company, without any manual intervention.
2) If the Licensee cannot provide evidence to challenge this assumption by meeting the more rigorous substance requirements, they are deemed to have not passed the test for economic substance.
Besides the substance requirements stated in Question 12, High Risk Intellectual Property Licensee is obligated to demonstrate their capability to exercise significant authority over the current and past development, maintenance, enhancement, exploitation and protection of Intellectual Property (IP) Assets. Furthermore, the Licensee must provide supporting evidence that demonstrates:
• The Licensee should employ an adequate number of qualified, full-time staff who are UAE residents and operate within the country. They must provide relevant information about these employees, including their contracts, experience, qualifications, etc.
• The Licensee must have a well-defined business plan that explains why they chose to keep the IP within the UAE.
• Significant decision-making processes have taken place and continue to occur within the UAE.
H. Business of Management of Investment Funds
48. What elements define a business of Investment Management in the United Arab Emirates?
A business involved in Investment Management in the UAE refers to a local organization that offers Investment Funds (IF), located either within the country or internationally, with the service of managing their investments on a discretionary basis.
The management of Investment Fund Business involves making discretionary decisions concerning divestments, investments, and risk management of investment portfolios. It is important to note that UAE-based entities providing investment advisory and fund administration services, along with custodial services for investment funds (IF), are not regarded as actively participating in the management of the said funds.
An Investment Fund, on its own, is not viewed to be involved in the management of Investment Funds unless it operates as a self-administered fund with both the Investment Fund and Investment Manager being part of a single entity.
I. Business of Lease-Finance
49. What is involved in a Business of Lease-Finance?
A business focused on lease-finance entails a UAE-based entity that provides financing or credit in return for various types of consideration.
The credit provision encompasses activities like loan offerings and engagement in other financing agreements, which may include hire purchase contracts and leases alike.
Furthermore, licensees involved in headquarters, insurance, banking, and management of investment fund businesses may also carry out financing or lease operations as a regular part of business operations. Licensees of such nature are not primarily engaged in financing or lease-related business activities. As a result, they are not required to independently meet economic substance requirements for any additional financing or lease practices to avoid redundant reporting.
50. What is the meaning of providing financing or credit?
The act of extending credit or providing financing involves various activities, including granting loans to both affiliated and non-affiliated entities, participating in finance leases for assets (excluding land), and extending credit through hire purchase agreements, long-term credit plans, and other financing agreements that encompass cash pool arrangements.
51. Is lending money within the corporate group considered a business related to lease-finance?
Certainly, if a UAE-based entity lends or offers any form of financial credit within the same corporate group, regardless of whether that entity is domestic or foreign, and does so in exchange for compensation such as interest, this activity would be classified as engaging in the business of Lease-Finance.
52. Does engagement in investment and trading of debt instruments fall under the category of participating in a business of Lease-Finance?
Entities within the boundaries of the UAE that invest in and maintain ownership of bonds and supplementary debt securities listed on an exchange with regulatory oversight do not fall under the category of engaging in the business of lease finance.
53. What forms the basis of consideration within a business specializing in lease finance?
In the context of Lease-Finance, consideration includes origination, processing charges, interest, gains from converting a debt into the debtor’s share capital, and penalties for late payments. However, providing security for the lending party is not considered part of the consideration.
J. Headquarter Business
54. What does the term Headquarter Business refer to?
In the UAE, a Headquarter Business pertains to an entity that offers services to entities within a group situated outside the country, and in doing so:
• Assumes responsibility for guaranteeing the overall prosperity and accomplishment of the entire group; or.
• Takes accountability for a vital component of the overall group performance.
55. Is it necessary for an entity to be a parent company in order to be classified as a headquarters entity?
The classification of a UAE based entity as being involve in headquarter business within a group of companies is not influenced by the corporate structure of the group. Instead, it solely relies on the services it offers to other foreign companies within the same group.
56. Is it possible for an entity to be involved in headquarter operations while also conducting another activity considered relevant?
An entity can engage in a Headquarter Business and other Relevant Activities, as long as these activities are distinct business operations. However, if the Licensee’s main Activity already includes an activity that falls under the Headquarter Business category, the entity will not be recognized as operating a separate Headquarter Business. For example, a UAE entity involved in other business activities, such as insurance underwriting, will be deemed as not conducting a Headquarter Business solely based on assuming substantial risk for the group.
57. Who is available to help me with my inquiries and concerns?
If you have any questions regarding MoF account registration or encountering login issues, please reach out to the designated email address provided by the MoF Call Center.
If you encounter any technical difficulties with the Economic Substance filing portal, such as your filed Notification not appearing on your Licensee dashboard, please do not hesitate to contact ESRsupport@cbrain.com for assistance.
If you have any inquiries regarding penalties or appeals related to the rules and regulations, please reach out to FTAESR@tax.gov.ae.
If you require any clarifications regarding the scope and application of the Economic Substance Regulations, you may find the relevant information on this webpage. Additionally, you can consider seeking professional advice as well to further assist you.
58. I approached a Regulatory Authority, but they were unable to provide assistance for my Economic Substance inquiry. What steps should I take next?
Kindly email ESinfo@mof.gov.ae and incorporate the following details in your message:
• Information about your business (name, main activity, legal form)
• The purpose of your inquiry or the reason for reaching out to the Regulatory Authority
• The Regulatory Authority’s name
• The representative’s name from the Regulatory Authority
Please be aware that neither your Regulatory Authority nor the MoF can help you determine the applicability and implementation of ESR for your business. For such inquiries, it is advisable to consult a professional expert.
59. After submitting a request to modify my Notification (or ES Report), when can I anticipate the approval of the request?
To obtain an update on the processing of your request, please directly contact the Regulatory Authority overseeing the approval of your amendment. Their contact details are available for your reference.
60. Who is required to submit/ file a Notification and what is the deadline?
Licensees and Exempted Licensees involved in any relevant and applicable Activity (regardless of whether they have generated income from it throughout the financial period) are required to submit or file a Notification within six months following the conclusion of the relevant financial period. All Notifications must be filed via the designated filing portal of the MoF.
61. Should I submit separate Notifications and ES Reports for each Relevant Activity if my business is engaged in more than one Relevant Activity?
No, if a business is involved in multiple Relevant Activities during a financial period, a single Notification and ES Report should be submitted encompassing all the conducted Relevant Activities.
62. Is it mandatory to file a Notification even if my business did not generate any revenue during this financial period?
Yes, Businesses that conducts an Activity that is classified as relevant during a financial period are obligated to submit or file a Notification irrespective of whether they generated revenue from that Relevant activity.
63. Is it feasible to submit a single Notification for more than one Licensees?
No, every Licensee is required to submit an individual Notification.
64. Is it possible to receive reminders from the Economic Substance Portal regarding the prompt submission of Notifications for future financial periods?
No, it is the Licensee’s responsibility to evaluate whether they are subject to the implementing regulations each year and to complete the required filings through the Economic Substance Portal.
65. Who is required to submit an ES Report and what is the deadline?
Licensees within the UAE must show economic substance and submit a Report, but only if they have income from any applicable Relevant Activity during the relevant fiscal period and are not out of scope of ESR. The deadline for submitting the Report is within 12 months from the end of the applicable financial period.
66. Is there any scenario where a business is solely required to submit or file a Notification and not obliged to submit an ES Report?
Yes, if the Licensee is classified as an Exempted Licensee or does not generate income from their Activity (if relevant), there is no obligation to submit an ES Report.
The evaluation of whether you need to submit the Report will be performed automatically by the filing portal for Economic Substance. This assessment is based on the information provided in your Notification. The filing portal will generate a Report only if it is deemed necessary.
67. Is a Licensee obligated to fulfill the filing requirements annually?
Yes, for every financial period during which a Licensee engages in a Activity (if relevant), they will be obligated to file a Notification and submit an ES Report if applicable.
68. After submitting a Notification or ES Report, will a Licensee receive a confirmation of their submission?
After the Notification or the Report is submitted, a confirmation email will be sent to the provided email address. If the confirmation email is not received within 24 hours, it is advised to reach out to ESRsupport@cbrain.com for further assistance.
69. Is it possible for a Licensee to alter the email address utilized for receiving correspondence related to Economic Substance?
Certainly! To change the email address for correspondence related to Economic Substance, please contact ESRsupport@cbrain.com. Along with a list of the case IDs associated with the old email address, provide the updated email address for correspondence.
70. Is it possible to access updated versions of the Notification and ES Report forms?
Certainly! You can find the template for the Notification form and Economic Substance Report, along with the corresponding guidance, on the MoFs official website.
71. What are the fines for not meeting compliance standards?
A penalty of AED 20,000 will be levied for failure to file a Notification.
Not submitting the Report of Economic Substance:
- Incurs a fine of AED 50,000; and
- Considered as not showing economic substance within the UAE
Failing to submit precise and comprehensive information:
- Incurs a fine of AED 50,000; and
- Considered as not showing economic substance within the UAE
Inability to show adequate economic substance for the applicable fiscal period:
- Incurs a fine of AED 50,000; and
- Sharing data with the relevant foreign competent authority of:
- holding or parent entity,
- ultimate parent entity, and
- ultimate or final beneficial owner
Second consecutive instance of failure
- Providing information to the foreign competent authority about:
- holding or parent entity,
- ultimate parent entity, and
- ultimate or final beneficial owner
- Fine of AED 400,000; and
- Your trade/commercial license may face suspension, revocation, or non-renewal
72. Will a late filing penalty be imposed if a company's exempted status is rejected after the initial ES Report submission deadline for the corresponding financial period?
No, if you file a Notification seeking an exemption from the Economic Substance Regulations and this exemption is not granted, you will have 30 business days to submit your ES Report starting from the date the exemption request was denied. Companies that deliberately and knowingly submit incorrect exemption claims may be subject to penalties.
73. What is the process for requesting a refund if a Licensee already paid a penalty but later receives a successful appeal from the tax authority for that penalty?
If a Licensee has gone through an appeal process with the tax authority and has already paid the penalty, they can request a refund by accessing the e-refund portal available on MoF website. The following link can be used to initiate the refund request: https://www.mof.gov.ae/en/mservices/government/govrevenu/pages/revenue-refund.aspx.
During the refund request process, the Licensee must submit the following information:
|Information||Where can the Licensee find this|
|Name of the Licensee||Licensee dashboard|
|RRN Number||eDirham receipt|
|Date of the transaction||eDirham receipt|
|Amount of the transaction (AED)||eDirham receipt|
|Department of MoF||eDirham Call Center|
|Dispute type (duplicate payment/excess payment)||Licensee to select|
|Duplicate RRN (if applicable)||eDirham receipt|
|Case ID of penalty case||Licensee dashboard|
|Case ID of appeal case (if applicable)||Licensee dashboard|
|Remarks on the dispute||Licensee to provide|
|Emirates ID, name, mobile number, and email||Licensee to provide|
|IBAN and bank name||Licensee to provide|
74. What factors should a Licensee take into account prior to the conclusion of a fiscal period?
Below is a list of key considerations that a Licensee should keep in mind and address before the conclusion of a financial period (Please note that this list is not exhaustive):
- Assess Relevant Activities carried out during the financial period by using the approach of “substance over any legal form”.
- Determine the category and amount of income generated (if any) from the Activity (if relevant) during the fiscal period.
- Conduct board meetings with minimum number of directors required to be physically present in the country;
- Ensure that the minutes of board meetings are signed and stored;
- Identify expenses and UAE-based assets (including premises) associated with the Activity (if relevant), and confirm that access to any assets (including office premises) can be supported by financial records and contracts/ agreements.
- Determine the count of employees (full-time) or other personnel based in the UAE who are responsible for overseeing the Licensee’s Relevant Activity, along with their respective qualifications.
- Ensure demonstration of control and management over any arrangements involving outsourcing of a function, for instance, through contracts or agreements.
Licensees may need to adopt further measures to exhibit a satisfactory level of economic substance for a given financial period. It is important to note that the above-mentioned actions may vary when a Licensee functions as a Holding Company or partakes in a High-Risk IP Business.
L. Supplementary Information
75. Is it possible for the MoF to recommend a company to assist us with matters related to Economic Substance?
Unfortunately, the Ministry is not able to recommend a specific company for Economic Substance assistance. However, there is a wide range of professional services firms in the country that should be capable of providing the support you require.
76. Do companies that are obligated to follow the Country-by-Country Reporting requirements also need to fulfill the Economic Substance Regulations' expectations?
If your company is involved in an Activity that is considered relevant in the context of the regulations, compliance with the Economic Substance Regulations is compulsory.
77. Is it necessary for my business to adhere to the Economic Substance Regulations if it comes under the Ultimate Beneficial Owner Reporting obligations?
In case your business engages in any activity that is considered to be relevant in the light of the implementing regulations, you are also required to follow the Economic Substance Regulations.
78. Is it possible to submit an ES Report right after filing a Notification?
Certainly! The Economic Substance Filing Portal enables companies to promptly submit their ES Report right after filing their Notification.
Kindly be advised that there could be a delay in creating the report as a result of high demand in specific instances. If your report is not produced instantaneously, please refrain from submitting another Notification. The report will eventually be generated, and you will get notified when it becomes accessible on your dashboard. In case you don’t receive an report within 24 hours, please do not hesitate to contact ESRsupport@cbrain.com for assistance.
79. Is it necessary for the Financial Statements accompanying the ES Report to be audited?
No, it is not mandatory. If audited financial statements are unavailable, you can provide unaudited financial statements or management accounts instead.
80. The ES Report does not require you to provide evidence related to assets, expenditure, board meetings held in the UAE, or other inquiries. However, it is advisable to keep this information on file, and if so, for how long should I retain it?
Yes, it is essential for all businesses to maintain relevant supporting information and documentary evidence on file and be prepared to present this data if requested by their Regulatory Authority or the tax authority.
At the very least, such information should be kept on file for a duration of six years.
81. Regarding ESR purposes, does the registration of a company in a free zone classify it as a tax resident in a jurisdiction other than the UAE?
No, offshore free zone companies must adhere to the Economic Substance Regulations in the same manner as standard free zone companies or those incorporated in the mainland UAE.
82. Is it necessary for the supporting documents for an exemption to be notarized/certified by a public notary or relevant government authority?
No, there is no requirement for documents to be certified or notarized. However, documents supporting tax residency in a foreign country or those providing evidence that the income of the UAE branch of a foreign company is taxed outside the UAE must be issued by the respective foreign tax authority.
83. Is it required to provide answers to all the questions in the ES Report template available on the MoF website?
No, the report is an intelligent form that automatically selects the appropriate questions for a Licensee to complete, taking into account their previous inputs and the provided information.
84. Which Regulatory Authority should I choose if my licensing authority is a DED?
The regulatory authority to which you should report may vary based on your Activity that is considered to be relevant, but in many instances, it will be the Ministry of Economy.
If your primary Relevant Activity is Banking or Lease-Finance, you are required to choose the Central Bank as the regulatory authority.
In case your primary business activity involves Insurance, you must specify the Insurance Authority as the related regulatory authority. Similarly, for Investment Fund Management (IFM) activities, you should choose the Securities and Commodities Authority as the appropriate regulatory authority.
85. Why is it not possible to select both a Holding Company Business and another Relevant Activity?
In order for a business to be classified as a Holding Company Business, it must refrain from participating in any other Relevant Activity. However, if your business meets the requirements for a Holding Company Business classification but is also involved in another Relevant Activity, please indicate the additional Relevant Activity when submitting your Notification.
86. I am unable to log in due to not receiving the activation email after setting up my MoF account.
Please ensure that you check your junk or spam email folders, as the activation email might have been filtered as spam. If you still cannot find the activation email, kindly contact the Ministry at firstname.lastname@example.org for assistance.
87. Would my Regulatory Authority receive both my Notification and ES Report via the filing portal for Economic Substance?
Yes, your Regulatory Authority will be able to access all the submissions you make via the Economic Substance Filing Portal.