2020 continues to be unpredictable with the UAE incorporating certain changes to the existing ESR (Economic Substance Regulations) policies, in a way to overhaul the existing principles associated with Economic Substance Regulations. As per the existing ESR guidelines, companies based out of the United Arab Emirates had to file reports, showcasing the legislative whereabouts, and tax-related activities.
Before we move any further, it is necessary to retrace the original guidelines issued on the 30th of April, 2019, as a part of the Resolution 31, postulated by the Cabinet of ministers. Besides that, specific regulations by the MOF (Ministry of Finance) were also put forth on 11th September 2019, via the Ministerial Decision no. 215. To put things in the hindsight, the existing ESR guidelines aimed at removing companies from the EU European Union) backlist and easing out the approaches for handling the Coronavirus pandemic followed by a more accommodative ESR filing deadline.
The new regulations started coming in on the 10th of August, 2020 as a part of the Resolution 57, to replace and repeal the existing Resolution 31. Similarly, Ministerial Decision 100 also comes to effect which inadvertently supersedes Decision 215 with immediate effect. While the new decisions and regulations were postulated on 10th August and 19th August respectively, official announcements were made on September 2.
As per Resolution 57, the authorities have issued a list of exempted licensees, as per the following categories including
- Investment funds and relevant setups
- Tax residents associated with jurisdiction other than that of UAE
- Foreign entity branches whose Relevant Income has been subjected to tax in another jurisdiction
- Business that is wholly owned by a UAE resident/s and not associated with a MNE (Multinational Group of Entities), and that only carries on business in the UAE.
However, to make the most of the exemption, the relevant companies must produce verifiable evidence and file the requisite notification.
Moreover, the Cabinet affirmed the establishment of FTA or the Federal Tax Authority for,
- Assessing the relevance of the licenses as per the ES tests
- Functioning as the National Assessing Authority
- Impose penalties, if and when relevant
- Hearing, ascertaining, and deciding on relevant appeals made by the licensees
- Exchanging information with competent authorities
The changes aimed at restructuring the chain of command and handing over the power to a centralized authority rather than that synonymous with the relevant licensee governing authorities include that of the Ministry of Economy, Free Zone Authorities, and more.
Besides that, changes in regulations and decisions also had an impact on the penalties and associated impositions, with
- Failure to submit notification is now penalized by the US $5,450, readily bumped up from $2,725 (AED 20,000)
- Failing the ES test is now charged at US $13,625 or AED 50,000
Apart from the following, failing the test in the subsequent fiscal year is also charged at a massive AED 400,000 followed by increased chances of license suspension, non-renewal, or revocation
- Providing inaccurate information is also subject to penalties, amounting to AED 50,000
Lastly, the new regulation also includes a provision for Random Inspections by the NSA (National Assessing Authority) officials.
However, more transparency in the discourse, deadlines, and relevant procedures are expected in the days to come. Other changes include
- The new guidance indicates that natural persons, sole proprietors, trusts and foundations are no longer in the scope of ESR.
- Distribution and Service Centre Business: The updated definition states that a Company that is purchasing from Foreign Connected Person and selling goods to a 3rd party outside the UAE, but the goods are not physically stored/ enter the UAE, would still be considered as conducting a Relevant Activity. This is in deviation to the earlier definition that required the goods to be imported and stored in the UAE.
- All licensees would now need to file a notification with the Ministry of Finance. This calls for resubmission of the notification by many companies who have already filed by 30th June. The notification must be filed once the MOF portal is available.
- Financial statements are now required as part of ESR report submission by the 31st December.
The features changes to the ESR guidelines instruct licensees to cross-check the documentation to stay relevant to the Economic Substance. Every aspect of ESR obligation, related to the Relevant Activities must be reiterated and analyzed to check for compliance failures, erroneous or delayed submission of notifications, delayed filing possibilities, and other forms of risk mitigations for avoiding penalties.
There will also be an online portal, launched by the MOF for filing reports and notifications, electronically, as per the new Decision 100.
ESR Return or Submission by 31st December 2020 is also stressed upon for licensees to verify compliance, once and for all. The ESR Return must declare the following:
- UAE-centric management with a relevant directorate
- Insights into the adequacy related to physical assets, expenditure, and workforce
- CIGA or Core Income Generating Activity channels across the UAE for Relevant Activities
Considering the brevity of the situation and the more stringent set of guidelines to adhere to, we, at IMC, might just help you stay within the scope of ESR while ensuring cent percent compliance and adherence to the existing regulations. In case of non-compliance is obvious, our professionals help speed the remediation process, within days.
As a leading global accounting firm, we help you assess the numerous impacts of the recent changes on the business and financial activities while paving the way for a more sustainable future. We conduct preliminary compliance assessments and offer time-intensive and efficient solutions for instilling a culture of holistic statutory and administrative transparency.