ESR: Economic Substance Regulation
On April 30 2019, the UAE Cabinet issued Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations in the UAE (the Regulations), requiring all in-scope UAE entities which conduct certain activities (Relevant Activities mentioned below) to have demonstrable economic substance in the UAE, effective immediately.
What is this in relation to?
The introduction of the Regulation follows the UAE’s firm commitment to comply with the EU requirements and illustrates the UAE’s ongoing efforts to reach the highest standards on taxation including the OECD’s requirements.
Who is subject to ESR Regulations?
The Regulations apply to all UAE onshore and free zone companies (including in the financial free zones) that carry on and generate income from one of the “Relevant Activities” listed below:
- Distribution and service center
- Fund management
- Holding company
- Intellectual property (IP)
How does this impact the Relevant Entities?
The Relevant Entities must satisfy the following criteria to meet the Economic Substance Test:
- Regulation contains specific requirement on how a company has to be directed and managed in the UAE
- Conduct core income generating activities in the UAE
- Have an adequate number of qualified full-time employees in the UAE
- Incur an adequate amount of operating expenditure in the UAE
- Hold adequate physical assets in the UAE
There are certain regulations in respect of holding companies whose income and profits are derived only from their equity investments. Additional requirements apply if an entity carries out “high risk IP related activities”.
Sanctions for non-compliance
Failure to meet the economic substance test and/or to provide information (or providing inaccurate information) results in significant financial penalties, and ultimately, a deregistration. Additionally, the Regulation provides that the UAE authorities may exchange information about non-compliant UAE-registered companies with the tax authorities in the states where their parent companies and UBO’s are resident.
How can we help you?
RNG can help the licensed entitiesto submit the followings to Regulatory Authority to meet their annual compliance:
- Notification: to the Regulatory Authority with the required information starting from 1st Jan 2020 onwards.
- Report: must have all the required information to be submitted within 12 months after the end of each Financial Year.
CBCR: Country by Country reporting
CbC Reporting is part of Action 13 of the Base Erosion and Profit Shifting (BEPS) initiative led by the Organization for Economic Co-operation and Development (OECD) and the Group of Twenty (G20) industrialized nations.
BEPS Action 13 requires large Multinational Groups of Entities (MNEs) to file a CbC Report that should provide a breakdown of the Multinational Group’s global revenue, profit before tax, income tax accrued and some other indicators of economic activities for each jurisdiction in which the MNE operates.
The purpose of CbC Reporting is to eliminate any gap in information between the taxpayers and tax administrations with regards to information on where the economic value is generated within the MNE Group and whether it matches where profits are allocated and taxes are paid at global level.
According to the Resolution, CbCReporting requirements are applicable to ‘financial reporting years’ starting on or after1st January 2019. Accordingly, for the financial reporting year starting on 1st January 2019, the CbC report must be submitted latest by 31st December 2020.
Groups of companies that meet the following criteria should comply with CbC Reporting legislation in the UAE:
- MNE Groups i.e. Groups which consist of two or more enterprises that are residents for tax purposes in different jurisdictions (an enterprise that is resident for tax purposes in one jurisdiction and has a taxable permanent establishment in another jurisdiction should be considered as a separate enterprise in the context of this definition); and
- Have a total consolidated revenue equal to or more than AED 3.15 Billion for the financial year preceding the reporting year concerned.
How can we help you?
RNG can help the licensed entities to submit the following to Regulatory Authority to meet their annual compliance:
- Analyze the group structure
- Identify the entities which are falling under other Tax jurisdictions
- Assist in preparation of information for CbC Notification and Reporting to regulatory authority