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MoF overhauls Economic Substance Regulations, Ministry of Finance (MoF) overhauls Economic Substance Regulations (ESR)

Ministry of Finance (MoF) overhauls Economic Substance Regulations (ESR)


MoF overhauls Economic Substance Regulations, Ministry of Finance (MoF) overhauls Economic Substance Regulations (ESR)

UAE recently announced its latest Economic Substance Regulations (ESR) on 10th August 2020 via Cabinet Resolution no. 57 of 2020, which repealed Cabinet resolution 31 of 2019, and it also updated guidance note, which was issued on 19th August 2020 via Ministerial Decision no. 100 of 2020. Therefore, all the entities enrolled in the mainland, and Free zones in UAE will have to comply with the new ESR Regulation. If the entities conduct relevant activity and earn relevant income from that activity, they will have to meet the “Economic Substance Test.”  

The new ESR will be enforced retrospectively on all licensee in the UAE from 1st January 2019. All the licensees carrying out a relevant activity have to re-file the notifications filed for Financial Year (FY) 2019. The ESR report will also need to be uploaded onto the portal within 12 months, following the end of the licensee’s FY (the first report is due by 31st Dec 2020 for the FY ended Dec 2019). 


Key changes in Amended ESR  

Economic Substance Regulations


1. Licensee

means a juridical person (incorporated inside or outside the UAE); or an unincorporated partnership (which is not a juridical person or general partnership) that conducts relevant activity. 

Note: a natural person, a sole proprietorship, a trust, and a foundation are outside the ambit of “licensees” under the ESR. 

2. Exempted licensee  

a) an Investment Fund.  

b) entity that is tax resident in a jurisdiction other than UAE.  

c) an entity entirely held by UAE residents and meets the subsequent requirements, i.e., the entity is not part of MNE Group, and all the entity’s activities are only carried out in the UAE.  

d) Licensee that is a branch of a foreign entity & Relevant Income of which is subject to tax in a jurisdiction other than the State.  

All the entities which profess to be an Exempted Licensee must submit to Regulatory authority, alongside a notification, adequate proof proving its status as an Exempted Licensee for each FY wherein it professes to be an Exempted Licensee  

The entity will be viewed as License for the purpose of ESR regulation, and they have to meet the economic substance test if they fail to provide adequate proof to authenticate them as an Exempted Licensee 

3. Connected person and group 

Connected Person: An entity that is the part of the same group as the licensee or the exempted licensee. 

Group: Two or more entities which are correlated through ownership or control in a way that they are compelled to prepare consolidated financial statements for financial reporting purpose.   

The definition of “connected person” excludes the natural person, and hence it will have direct consequences on relevant activity classifications that deal with connected persons. 

Furthermore, offering services to or procuring goods from entities that have not prepared consolidated financial statements at the parent level or intermediate level will not be included in the “group” definition and, therefore, would not be covered under a relevant activity. This amendment will directly impact the licensee’s relevant activity classification that transacts with entities whose financial statements are not consolidated.   

4. Distribution & Service centre business 

The previous definition of a ‘Distribution Business’ required the procurement of goods from a Foreign Connected Person (as defined in the previous ESR), importing goods into UAE and consequently reselling them outside UAE. The definitions currently have excluded the necessities to import and export the goods from UAE. 

Therefore, under a new ESR, the licensee is deemed to be engrossed in “Distribution Business” if the licensee procured goods from a foreign group company and delivers those goods. The necessity of physical importation & storage in UAE and the necessity of reselling it outside UAE has been scrapped. Prior to the amendment, purchase from the foreign connected person and local sales were beyond the scope. Now the local sales are also included in the ambit of definition.  

The definition of “Service Centre Business” has also been amended, and it scraped the necessity of the services to be in association with a business outside. Now, the licensee is deemed to be considered as “Service centre Business” if it offers services like administrative, consulting, or any other services to a foreign company’s business outside UAE.  

The amended definitions would affect MNC’s in UAE, and they have to re-evaluate whether they are in the ambit of new Distribution and Service centre business.  

5. Holding Company business 

MoF overhauls Economic Substance Regulations, Ministry of Finance (MoF) overhauls Economic Substance Regulations (ESR)

In the previous regulation, there were two definitions relating to Holding Company and Holding Company Business, now it has been amended, and the new ESR solely defines Holding company business means a business that it has its sole function as acquisition and holding of shares or equitable interest in other companies and earns dividend & capital gains form its equitable interest.  

6. National Assessing Authority 

The UAE Federal Tax Authority (FTA) has been appointed as the National Assessing authority who shall conduct the assessment, impose penalties, hear and decide the appeals, etc. and alternatively, the relevant regulatory authority will oversee the collection of information and documentation from the Licensees.  

7. Compliance during liquidation 

A Licensee & an Exempted Licensee shall be bound by the ESR regulation till the time they exist. Throughout the course of the liquidation or winding-up process, if the entity continues to carry out the relevant activity and earns relevant income, the liquidators must make sure that the entity remains to comply with ESR regulation.  

8. Clarification regarding the treatment of branches 

a) UAE branch of a UAE company: UAE branches would not be considered as a separate legal entity if its parent company is registered in the UAE itself. The new ESR has clarified that a single notification/ report is to be filed by the parent company. 

b) Foreign branch of a UAE company: If the entity is registered in UAE and it has foreign branches which carry out the relevant activity in a foreign jurisdiction, the UAE licensee do needs comply with ESR regulation provided that the foreign branch is subject to tax on all of its relevant income in the foreign jurisdiction. 

c) UAE branch of foreign company: UAE branches of foreign companies do not need to comply with ESR, given that their relevant income is subject to tax in foreign parent jurisdiction. 



New ESR will now require the businesses to re-evaluate and reassess their business activity to conclude whether they conduct the relevant activity or not. N R Doshi & Company can assist you in classifying your entities for complying with new ESR regulations. We can also advise you on ESR notification & report filling with the relevant authority and other corporate services allied with ESR regulation.



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