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ESR Advisory - N R Doshi & Partners

ESR Advisory Services

We provide ESR Advisory Services to help companies remain compliant with the requirements of Economic Substance Regulations UAE. We start with a review of group structure and activities, determine ESR applicability, and evaluate compliance with ESR. We then decide on corrective actions, establish ESR compliant policies, assist in filing notifications, and Economic Substance reports. We also provide training on Economic Substance regulations and policies.

Economic Substance Regulations UAE

In May 2018, UAE joined the OECD Inclusive Framework on BEPS as a part of its commitment as a member of OECD. H.H. Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai has announced the Resolution of the Cabinet of Ministers No. (31) for 2019 concerning Economic Substance Regulations (ESR/Regulations) on 30 April 2019. Ministry of Finance issued directives (Ministerial decision No. 215) with an objective to make available more details regarding the legislation of economic substance requirements in UAE.

ESR-Advisory-Services

Objective of ESR

The main purpose of the ESR is to protect the reputation of the State and whose entities that operate within UAE- whether onshore, Free Zone or offshore by ensuring that income generated from Relevant Activity has economic substance and give a base to support that the incorporation in the UAE was not motivated to benefit from the privileged tax regime.

Entities subject to ESR

Companies that are registered and established in UAE including Free Zone or in a Financial Free Zone that carry out the Relevant Activities.

ESR-Industries
ESR-Activity

What are the Economic Substance Requirements/ Test?

The economic substance test is established on the three crucial pillars that a Licensee/Company must fulfil the criteria as under, to meet the Economic Substance Test in relation to any Relevant Activity.

  1. Core Income Generating Activity (“CIGA”) associated to the activities covered by the ESR should be undertaken in the UAE;
  2. Licensee/Company should be directed and controlled from the UAE;
  3. The Licensee’s activities must be carried out with adequate local “Economic Substance” with regard to the level of relevant activity in the UAE. The Economic substance consists of:
    • Full-time employees
    • Expenditure
    • Premises

Explaining Core Income Generating Activity (CIGA)

Article 5 of the Cabinet Ministers Resolution No. 31 defines State Core Income-Generating Activities means activities that must be conducted by a Licensee in the State (UAE) and shall include:

RELEVANT ACTIVITY CIGA Regulatory Authority (pursuant to Cabinet Resolution No 58 of 2019)
Banking Business (a) Raising funds, managing risk including credit, currency and interest risk.
(b) Taking hedging positions.
(c) Providing loans, credit or other financial services to customers.
(d) Managing capital and preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business
1. UAE Central Bank
2. The competent authority in the Financial Free Zone for the Banking Business
Insurance Business (a) Predicting and calculating risk.
(b) Insuring or re-insuring against risk and providing Insurance Business services to clients.
(c) Underwriting insurance and reinsurance
1. Insurance Authority
2. The competent authority in the Free Zone and Financial Free zone for the Insurance Business
Investment Fund Management Business (a) Taking decisions on the holding and selling of investments.
(b) Calculating risk and reserves.
(c) Taking decisions on currency or interest fluctuations and hedging positions.
(d) Preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business
1. Securities and Commodities Authority
2. The competent authority in the Free Zone and Financial Free zone for the Investment Fund Management Business
Lease Finance Business (a) Agreeing funding terms.
(b) Identifying and acquiring assets to be leased (in the case of leasing).
(c) Setting the terms and duration of any financing or leasing.
(d) Monitoring and revising any agreements.
(e) Managing any risks
1. UAE Central Bank
2. The competent authority in the Free Zone and Financial Free zone for the Lease-Finance Business
Headquarters Business (a) Taking relevant management decisions.
(b) Incurring operating expenditures on behalf of group entities.
(c) Coordinating group activities
1. Ministry of Economy
2. The competent authority in the Free Zone and Financial Free zone for the Headquarter Business
Shipping Business (a) Managing crew (including hiring, paying and overseeing crew members).
(b) Overhauling and maintaining ships.
(c) Overseeing and tracking shipping.
(d) Determining what goods to order and when to deliver them, organising and overseeing voyages.
1. Ministry of Economy
2. The competent authority in the Free Zone and Financial Free zone for the Shipping Business
Holding Company Business Activities related to a Holding Company Business 1. Ministry of Economy
2. The competent authority in the Free Zone and Financial Free zone for the Holding Company Business
Intellectual Property Business (a) taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income.
(b) taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset.
(c) carrying on the ancillary trading activities through which the intangible assets are exploited leading to the generation of income from third parties
1. Ministry of Economy
2. The competent authority in the Free Zone and Financial Free zone for the Intellectual Property Business
Distribution and Service Centre Business (a) Transporting and storing component parts, materials or goods ready for sale.
(b) Managing inventories.
(c) Taking orders.
(d) Providing consulting or other administrative services
1. Ministry of Economy
2. The competent authority in the Free Zone and Financial Free zone for the Distribution and Service Centre Business

EXEMPTED ENTITIES FROM ESR

Licensees that are directly or indirectly owned at least 51% by the Federal or Emirate Government or a UAE Governmental Authority or body.

NOTIFICATION AND FILING OF RETURNS

Companies who meet ES Test are required to notify as well as file Economic Substance Return within 12 months from the end of the relevant financial period.

TIMELINES FOR NOTIFICATION FILING

Regulatory Authority Requirement of Filing Notification How to file When to file
Dubai Airport Free Zone All Licensees including those who qualify for exemption are required to notify DAFZ portal 3rd June 2020
Dubai International Financial Centre All Licensees including those who qualify for exemption are required to notify DIFC portal 12th June 2020
Dubai Multi Commodity Centre All Licensees including those who qualify for exemption are required to notify DMCC portal 30th June 2020
Dubai World Trade Centre Entities that are carrying out Relevant Activities info@dwtcauthority.com 30th June 2020
Dubai Aviation Corporation All Licensees including those who qualify for exemption are required to notify economicsubstance@dacc.ae 7th June 2020
Securities and Commodities Authorities (SCA) SCA has notified to all Investment Management, Management Company firms under its regulation fms@sca.ae 31st March 2020
Abu Dhabi Global Market Entities that are carrying out Relevant Activities economicsubstance@adgm.com 30th June 2020
RAKICC All Licensees including those who qualify for exemption are required to notify RAK ICC portal by registered agent 30th June 2020
RAKEZ All Licensees including those who qualify for exemption are required to notify RAKEZ portal 30th June 2020
Ajman free zone All Licensees including those who qualify for exemption are required to notify info@afz.ae 30th June 2020
Dubai Silicon Oasis All Licensees including those who qualify for exemption are required to notify lic_section@dso.ae 31st May 2020

Ministry of Economy, which regulates the mainland companies who are issued licenses by the Department of Economic Development, has extended the notification filing date to 30 June 2020. The deadline for filing Economic Substance Return for the Financial Year 2019 remains unchanged. The relevant notification may be found here.

Notifications and Return/ Report Filing

Companies who meet ES Test are required to notify the Regulatory Authority (onshore, Free Zone, offshore) as well as file Economic Substance Return within 12 months from the end of the relevant financial period.

Offenses and Penalties

An entity who commits the offence will be liable to an administrative penalty of between AED 10,000 and AED 50,000 if it either

  • fails to provide the required information or
  • knowingly provides inaccurate information.

A stricter penalty would be applied for failure to meet the Economic Substance Test. This increases to between AED 50,000 and AED 300,000 in the subsequent year(s).
Failure to comply may result to stricter actions from the Authorities including suspension or strike off, deregister, suspend, revoke or deny renewal of a company’s license.
The Ministry of Finance also has the authority to report any non-compliance to a company’s foreign regulators, subject to the provision in international agreements (e.g. double tax treaties) , which could attract strong and unwanted scrutiny.

Maintenance of Records

Records will have to be maintained for a period of 6 years. In case the authorities find that there is any deliberate misrepresentation or negligent or fraudulent intention then time bar period of 6 years won’t apply.

ESR Advisory Services

N R Doshi & Partners has a team of experienced professionals to provide you ESR Advisory Services. Our ESR team is eager to work with you and help you solve compliance issues.

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