• Business Planning
  • January 20, 2021

Economic Substance Regulations, Simplified for You!

The Economic Substance Regulations (ESR) require UAE onshore and free zone companies, and certain other business forms that carry out any of the defined 'Relevant Activities' to maintain and demonstrate an adequate 'economic presence' in the UAE relative to the activities they undertake. 

 

ESR's purpose is to ensure that UAE entities report actual profits that commensurate with the economic activity undertaken within the UAE. 

 


Why the Economic Substance Regulations came into force?

 

As part of the UAE's commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE's tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No.31 of 2019) in April 2019. There has been some amendments to the regulations post its initiation. 

 

 


So, which are these 'Relevant Activities' that are subject to ESR? 


They are 'Licensees' that carry out the below activities:

 

- Banking Businesses

- Insurance Businesses

- Investment Fund Management Businesses

- Lease-Finance Businesses

- Headquarter Businesses

- Shipping Businesses

- Holding Company Businesses

- Intellectual Property Businesses

- Distribution and Service center Businesses

 

 

 

Who are these 'Licensees'?


A Licensee is a juridical person or an unincorporated partnership that is registered in the UAE and that undertake any of the above mentioned activity. For example, a Licensee can be:

 

 

- A limited liability company

- A private shareholding company

- A public shareholding company

- A joint venture company

- A partnership (e.g. a limited liability partnership, a limited partnership, a general partnership, etc.)

 

 

However, the below are not considered Licensees under the Regulations:

 

- A natural person

- A sole proprietorship

- A Trust

- A Foundation

 

 

 

What should Licensees keep in mind?

 

 

Like every filing and reporting exercise, this too has a deadline. The final date for submitting the ESR Notification & Report on the Ministry of Finance (MOF) Portal is January 31, 2021. Here are some key points to consider:

 

 

- The commercial license may indeed state the Relevant Activity, a 'substance over form' approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the Regulations. This means looking beyond what is stated on the commercial license to the 'Activities actually undertaken by the Licensee during a financial period.'

 

- Licensees and Exempted Licensees that undertake a Relevant Activity (irrespective of whether the Licensee or exempt Licensee has earned income from the Relevant Activity during the financial period) are required to file a Notification within six months from the end of the relevant financial period. All Notifications must be submitted on the Ministry of Finance filing portal.

 

- Offshore Companies are also covered if they are doing Relevant Activity.

 

- If a Licensee does not undertake a Relevant Activity during a financial period, it does not need to meet the Economic Substance Test, Licensee would not be required to submit a Notification or submit an Economic Substance Report for the relevant financial period.

 

- A Licensee that undertakes a Relevant Activity but that does not earn income from this activity in a financial period, is not required to meet the Economic Substance Test or file an Economic Substance Report for that period. However, the Licensee would still need to submit a Notification on the Ministry of Finance filing portal.

 

- Penalty of Failure to submit the Notification is AED 20,000

 

- Penalty of Failure to submit the Report is AED50,000

 

 

The last date for filing is approaching soon and to avoid any penalty, we recommend that you comply with the regulation by submitting the Notification & Report on the Ministry's portal as soon as possible.

 

 

 


For RAKBANKBusiness customers, our exclusive partner MI Capital is pleased to offer free of charge 'ESR ASSESSMENT' advisory regarding applicability of ESR on your business. Feel free to reach out to MI CAPITAL at [email protected] or visit www.micapitalservices.com to know more about their services. 
 

 

 

 

 

 

Source
ESR Simplified for You by MI CAPITAL

Ministry of Finance

 

 

 

 

 

Disclaimer: The National Bank of Ras Al Khaimah (P.S.C) ("RAKBANK") is making this information available to you for ease of reference, without verifying its contents. The information has been prepared by MI Capital ("MI Capital"), a service provider of RAKBANK. RAKBANK does not make any express or implied warranty that this information is accurate or complete or that it may or should be relied upon as such. The information should not be construed as an advice on legal, financial or regulatory issues and no person should rely on it without obtaining independent advice from qualified professionals. RAKBANK, its employees and officers expressly disclaim all liability and responsibility to any person in respect of anything done or omitted to be done in reliance on this information, whether wholly or partially, or for any error or omission in this information. This information is given in summary form and does not purport to be complete. This information is strictly confidential and shall not be disclosed to anyone other than the addressees and shall not be duplicated or used in whole or in part without the prior written consent of RAKBANK or MI Capital. RAKBANK disclaims any responsibility for the accuracy, fairness, completeness and correctness of this information. RAKBANK, its related entities and persons, including body corporates, directors, employees or agents is not liability for any loss or damages of whatever nature incurred by any person including the recipients of this information resulting directly or indirectly from any error, fault, negligence, inaccuracy or incompleteness of this information. RAKBANK is not obliged to update this information and may withdraw it at its sole discretion at any time. This information provided for information purposes only and does not constitute an offer to sell, commitment or a solicitation to buy any product or services from any person or entity including MI Capital. 
 


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