UAE Ministry of Finance Amended ESR Regulations

UAE Cabinet of Ministers amended the ESR Law and guidance via Cabinet Resolution no 57 dated 10 August 2020 and Resolution no 100 of 2020 on 19 August 2020, respectively, collectively called Amended Regulation which repealed the Original Regulation.

Required licensee must Resubmit the ESR Notification on the MOF portal, date to be announced.

Critical Changes Summary:

1- Change in Licensee Definition

o Licensee is defined as “a Juridical Person (incorporated inside or outside the state)”.

o An Unincorporated Partnership.

o Registered in the state or free zone and carrying on a Relevant Activity.

Natural person, sole proprietors, trust, and foundations are no longer in the scope of ESR Regulations, therefore no longer required to file notification and meeting ESR Tests.

2- Exemptions to Certain Licenses

The amended ESR Regulations introduced following exemptions:

o A Licensee that is Tax Resident outside UAE.

o Investment Funds and Its SPVs or Investment Holding Entities.

o Wholly owned by UAE residents Licensee, and which is carrying on business only in UAE and is not part of a multinational group.

o A Branch of a foreign entity that is subject to tax outside UAE for all of its Relevant Income.

The above entities need to a) file notification and b) provide sufficient evidence substantiate their status Entities that are directly or indirectly owned at least 51% by the UAE Government are no longer exempt from ESR, such entities maybe needed to comply ESR amended regulations.

3- Change in Connected Person Definition

o A connected person is the entity that is a part of the same group as the licensee or exempt licensee.

o A group is defined as two or more related through ownership or control such that those must prepare Consolidated Financial Reporting under the accounting standards.

4- FTA as National Authority for ESR

Extremely important step under amended regulation is the appointment of FTA as ESR assessing and enforcing authority. This will bring uniformity of requirements and reporting in UAE.

5- MNE Group Definition Included

MNE Group means two or more entities the tax resident of which is in different jurisdictions or An entity that is resident for tax purposes in one jurisdiction and is subject to tax, with respect to activities carried out through branch/ permanent establishment in another jurisdiction.

6- Relevant Income Definition Included

It was not defined in the original ESR regulation, now defined as “all income of an entity from a relevant activity that is recorded in books under applicable accounting standards whether earned I UAE or outside irrespective whether the entity derived a profit or loss from that activity.

7- Clarification of Branch Entities

Branches are no more considered as separate entities, the HO or parent companies registered in UAE must report the ESR as single licensee including all its branches.

UAE Branches of foreign entities will be out of scope if the relevant income of those branches is taxed in foreign jurisdictions.

Foreign branches of UAE businesses are not in the scope of ESR if the relevance of those branches are taxed in foreign jurisdictions.

8- Financial Statements in ESR Report

UAE Amended ESR Regulations necessitates the inclusion of Financial Statements in the ESR Reporting. The important point is the financial statements of each licensee to be reported, not only as a group.

9- Change in Definition of Distribution & Service

A Licensee is considered as engaged in “Distribution Business” if,

o Purchase raw material or finished good from a foreign group company, and

o Distributes those raw materials or finished goods.

Importing and storing good in the UAE clause is removed.

A Licensee is considered as engaged in “Service Center Business” if provide Consulting, Administrative or other services to a foreign group company. Services provided to “in connection with a business outside the state” is no more required.

10-Changes in Conditions of High-Risk IP Licensee

The High-Risk IP business conditions are changes as follows:

o The Licensee did not create the Intellectual Property Asset which it holds for the purpose of its business, and

o The Licensee acquired the IP assets from:

– A connected person, or

– In consideration of funding research and development by another person situation in a foreign jurisdiction.

o The licensee licenses or sold the IP asset to one or more of the group companies or earn separately identifiable gross income, like royalties/license fee, from foreign group companies in respect of the use or exploitation of the IP asset.

The (b) condition of the old regulation “the Licensee does not carry out research and development, or branding, marketing and distribution as part of its State Core Income-Generating Activity” is removed.

11- Changes in Lease Finance Business

o Renting assets, equipment, or any other good to another person for consideration is now deleted from the scope of Lease-Finance Business (as per FAQs).

o Reporting under Lease-Finance Business is not required if an entity is engaged under Headquarters Business, earlier was required under both.

o Cash pool arrangements are specifically considered as Lease-Finance Business

12-Changes in Holding Company Business

Real estate assets owned by the Licensee that is solely used for purposes of Holding Company Business will not prevent such Licensee from being considered as carrying on a Holding Company Business.

13-Change in ESR Test Requirements

Under “Directed & Managed”, the requirement of holding at last one meeting in UAE is now removed.

14-Timeline to submit Notification

The Notification must be submitted within six months from the end of the Financial Year of the Licensee or Exempted Licensee

15-Changes in Penalties and Offences

16-Disclaimer

This article is intended for information purpose only, it is not a legal opinion or advice.