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ESR
THE COMPLETE GUIDE

Phone Number Email Address Address

+971 (0)50 5302603 sales@aaconsultancy.ae Office No. 208, Rawdat Al Wasl, Buiding Business Bay, Dubai
COMPLETE GUIDE
FOR ESR
As a part of UAE’s commitment as a member
of OECD inclusive framework, it introduced
a Resolution on the Economic Substance
(Cabinet of Ministers Resolution No.31 of
2019, the 'Regulations') on 30 April 2019.

Recently, the Ministry, in an attempt to

revamp the Erstwhile Regulation has issued
an amended Regulation (vide Cabinet
Resolution No 57 of 2020) and guidance
(Ministerial Decision No 100 of 2020)

The Regulations require UAE onshore and

free zone companies and certain other
business forms that carry out certain
activities to maintain and demonstrate an
adequate “economic presence" in the UAE
relative to the activities they undertake. The
purpose of the Regulations is to ensure that
UAE entities report actual profits that are
commensurate with the economic activity
undertaken within the UAE.

WHEN DO REGULATIONS
ENTER INTO FORCE?
These amendments redefine the scope and
administration of the Economic Substance
regime in the UAE, subject to a retrospective
effect from 1st January 2019.

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 WHO IS SUBJECT TO THE REGULATIONS?
A company or licensee who is a juridical person; or an unincorporated partnership registered
in the UAE, including Free Zone and Financial Free Zone and carries on a Relevant Activity.

The Regulations apply to Licensees that carry out any of the following
Relevant Activities.

Banking Businesses Shipping Businesses

Insurance Businesses Holding Company Businesses

Investment Fund Management Businesses Intellectual Property Businesses

Lease-Finance Businesses Distribution and Service center

Headquarter Businesses Businesses

CHANGES IN DEFINITION AND TREATMENT

Treatment of branches
Earlier, the Regulation required the entire licensees (including branches) who have
undertaken Relevant Activity to comply with the Regulation.

The amended Regulation clarifies the compliance requirement for UAE as well as foreign
branches as under:

UAE branch of UAE entity – It is merely an extension of 'parent' or 'head office' and, therefore,
not considered as a separate entity for this Regulation.

Foreign branch of UAE entity - UAE entity is not required to consolidate activities/income
of foreign branch for ESR provided that the income of such branch is subject to tax outside
the UAE. In this context, the branch includes a Permanent Establishment or any other form of
taxable presence for corporate income tax purposes.

UAE branch of a foreign entity - It is clarified that such an entity is required to comply with
Regulation unless the Relevant Income of such branch is subject to tax outside UAE.

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 Exemptions

Earlier, licensee owned (more than 51%) by Federal or Emirate Government, directly or
indirectly, were exempt from Regulation. This exemption has been removed by the
New Regulation.

Additionally, the amended Regulation has enlarged the exemption to the following
categories:
Investment Fund.
A company that is a tax resident of a country outside the UAE.
A licensee who is completely domiciled in the UAE (not part of a MNE group and no
cross border activities).
Branch of a foreign entity which is taxed outside the UAE.

However, the exemption to the above categories will be applicable only upon submitting
evidence to fulfill the conditions prescribed for exemption.

Connected Persons
An entity - part of the same group as the entity or an exempted entity.

Group
Two or more entities related through ownership or control such that they are required
to prepare consolidated financial statements for financial reporting purposes under
applicable accounting standards.

Administration
Ministry of Finance has appointed Federal Tax Authority as the "National Assessing
Authority", responsible for enforcing compliance of ESR which include.

Assess whether an entity has met the ES Test.

Impose administrative penalties.
Hear and decide on appeals.
Carry out reporting requirements.
Exercise any other powers or functions as required in implementing ESR.

Furthermore, MOF has also redefined or clarified terms such as UAE Residents, Parent
Company, Ultimate parent Company, MNE group, Relevant Income, Consolidated
Financial Statements, Unincorporated Partnership etc.

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 Distribution and Service Centre Business
Purchasing from a Foreign Connected Person and importing and storing in the State:
component parts or materials for goods; or goods ready for sale, and reselling such
component parts, materials or goods outside the State–Providing services to Foreign
Connected Persons in connection with a business outside the State .

Buying from a foreign related person, components of parts, materials for goods or
commodities ready for sale and re-sale of these components or goods. Providing services
to foreign related persons.

The updated definition of the Distribution and Service Centre Business in the New ESR
excludes the reference to ‘import and store the goods in the UAE’. Therefore, if a UAE
entity is purchasing and selling goods but the goods do not physically enter/are stored
in the UAE, the entity would be considered conducting an RA.

Moreover, the reference to ‘in connection with a business outside the UAE’ has been
removed from the definition of the Distribution and Service Centre Business in order
to widen the coverage of services provided from a UAE entity to a foreign related party.

High-Risk Intellectual Property Licensee

The New Regulations have provided much-needed clarity on this relevant issue, which
is at the center of profit shifting in most cases – the intangible-related transactions.

The New Regulations have now clarified that a licensee would be covered under the
Regulations if it derives income from licensing or selling of an intellectual property to
a foreign-related party. Also, if such an intellectual party was previously acquired from
Connected Person or in consideration for funding research and development by
another person situated in a foreign country.

Lease- Finance Business

A UAE entity is considered engaged in a lease-finance business if it offers credit or
financing for any form consideration.

Cash Pools are now considered as Offering credits or financing now includes Cash Pool
arrangements.

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 Holding Company Business
An entity is considered to be engaged in Holding Company Business if:

Its sole function is the acquisition and holding of shares or equitable interests in other
companies; and Only earns dividends and capital gains from its equitable interests.

“Dividends” has now been defined to mean any distribution of profits to the holder of
shares or equitable interest in another company or incorporated partnership.

Further, if real estate assets are used only for holding company business, and no other
income is generated out of such assets, then the said entity would still be regarded as
Holding Company Business.

ES notification
Licensees were required to file the Notification with the respective Regulatory Authority
at the time and format specified by the respective Regulatory Authority.

All Licensees regardless of whether they are exempt, are required to file a notification
electronically on the MOF portal within six months from the FY end.

Licensees that have already submitted a Notification directly to their Regulatory

Authorities are required to re-submit a notification in accordance with the provisions
of the New ESR at the MOF Portal once available.

OTHER SIGNIFICANT CHANGES

Notification - must be submitted within six months from the end of Licensee's or
Exempted Licensee's end of Financial Year. Licensees that have already submitted
their notification directly to their Regulatory Authority will have to re-submit via the
Ministry of Finance portal once available.

Licensee - may outsource activities which are not CIGAs to outside the UAE, e.g.
outsourcing of back-office functions, IT, payroll, legal services, or other expert profes-
sional advice or specialist services provided.

Board Members - not required to be UAE residents but are required to be physically
present in the UAE when taking the decisions and minutes of the Board Meetings must
be recorded.

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 Penalties

The amended Regulation has increased the administrative penalty in certain offenses.
We have summarized the administrative penalties as under:

As per original As per amended

Offense
Regulation (in AED) Regulation (in AED)

Failure to notify/filing 10000 to 50000 20000

inaccurate particulars

Failure to meet substance 10000 to 50000 50000

test (First Year)

Failure to meet substance 300000 400000

test (Subsequent Year)

Additionally, in certain cases, the penalty included sharing of information with foreign
competent authority as well as suspension/cancellation of license.

Timeline of Economic Substance Regulation

Notification must be submitted within six months from the end of Licensee's or
Exempted Licensee's end of Financial Year. Licensees that have already submitted
their notification directly to their Regulatory Authority will have to re-submit via the
Ministry of Finance portal once available.

ESR reports will have to be submitted within 12 months, following the end of the
licensee's financial year-end.

Documents required for ESR

Audited Financial statement for the relevant period.

Corporate documents.

List of Employee.

Lease agreements.

Details of activities Outsourced to third parties & details of each

Outsourcing provider, if any.

Details of Ultimate Beneficial Owner / Ultimate Parent Company.

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Pricing details

Package 1 Package 2 Package 3

ESR Notification filing with UAE ESR Notification & Report filing Audit of Financial statements
Ministry of Finance. with UAE Ministry of Finance. for the relevant period.

Companies not generating

revenue during a financial year ESR Notification & Report
from any of the "Relevant filing with UAE Ministry of
Activities" need to file the ESR Finance.
Notification only.

Proposed Fees Proposed Fees Proposed Fees

AED 3,000 + VAT AED 5,000 + VAT AED 10,000 + VAT

Get In Touch With Us

Phone Number Address
+971 (0)50 5302603 Office No. 208, Rawdat Al Wasl
Buiding Business Bay, Dubai
Email Address
sales@aaconsultancy.ae

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