ESR SERVICES IN
DUBAI, ABU DHABI
& THE UAE
Our ESR service in Dubai, Abu Dhabi and the UAE is part of our tax consultancy services in Dubai, Abu Dhabi and the UAE.
On 30 April 2019, the United Arab Emirates (“UAE”) Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 (concerning economic substance regulations in the UAE, “the Regulations”). The introduction of the Regulations requires relevant UAE entities that perform certain business activities to be able to demonstrate economic substance in the UAE as of 30 April 2019.
WHY HAVE THESE REGULATIONS BEEN INTRODUCED?
The launch of the Regulations follows the outcome of the European Union (EU) including the UAE on a list of non-cooperative jurisdictions for tax purposes (EU Blacklist). In addition, the Regulations demonstrate the continuous efforts of the UAE to fulfill all EU requirements and the highest international standards on taxation including the Organisation for Economic Co-operation and Development (OECD) conditions.
WHO WILL NEED TO COMPLY WITH ESR?
The substance requirements will apply to all UAE onshore and free zone companies that undertake the below-listed Core-Income Generating Activities (“CIGA”) in relation to the following known as “Relevant Activities”:
FINANCE AND LEASING BUSINESS
- Agreement on funding terms including the type of fund, amount of funding, currency, interest rates, security given, and covenants if any.
- Identifying and purchasing assets for leasing purposes.
- Negotiating and setting the terms and duration of financing and leasing.
- Monitoring and revising any financing and leasing agreements.
- Managing of any risks related to financing and leasing activity.
INVESTMENT FUND MANAGEMENT ACTIVITY & BUSINESS
The activity is related to Discretionary Investment Management Services, in which investment management is made on behalf of clients and given that it is a self-managed fund where the Investment Manager and the Investment Fund are of the same entity.
- Making independent decisions related to holding and selling of investments.
- Calculating risks and reserves.
- Taking decisions on hedging arrangements against currency and/or interest fluctuations.
- Preparing reports to private investors or government authorities related to the investment fund management, supervision and regulation of the business.
BANKING RELATED BUSINESS
- Raising funds, raising capital, issuing bonds, managing risks, accepting deposits of money from the public.
- Providing or giving of loans, credit, advances, overdrafts, guarantees or similar activities.
- Making of investments and managing capital of private investors and government authorities.
INSURANCE RELATED BUSINESS
- Predicting and calculating risk.
- Insurance or re-insurance against risk including captive insurance.
- Underwriting insurance and re-insurance.
HOLDING COMPANY BUSINESS
A Holding Company would need to meet its required economic substance if its activities are related to the acquisition and holding of shares or equitable interest in other companies and it does not carry any additional or other commercial activity. In case, a holding company business carries another activity, then it will need to meet the economic substance requirements of the different Relevant Activity category (if falls within the CIGA scope of the Regulations).
The company will be considered as a headquarter business if it provides the following CIGA to foreign group companies; in disregard to whether the company is the direct or ultimate parent company of the group or is engaged in a different industry/business nature.
- Taking relevant management decisions.
- Purchasing significant assets or services on behalf of the group entities.
- Coordinating the functions of the group entities including marketing, HR, IT, and Finance etc.
INTELLECTUAL PROPERTY (IP)
The CIGAs for an Intellectual Property business are the holding, exploiting, or receiving gross income from intangible assets such as copyrights, patents, trademarks, brands and technical know-how; in return for an income in form of a royalty, license fee, franchise fee, capital gain or any other income from the sale or exploitation of an IP asset.
DISTRIBUTION & SERVICE CENTER BUSINESS
The CIGA of a Distribution Center are:
- Transportation and storage of raw materials and finished goods, in addition to managing risks associated with this activity.
- Managing Inventory.
- Taking and processing orders.
The CIGA of a Service Center refers to the provision of consulting and administrative services to related foreign group companies.
A shipping business would be considered engaged in the following related CIGA only if it operates the ships
- Managing Crew including the recruitment, training, and on-going management of the crew.
- Overhauling and maintenance of the ship.
- Management, oversight and tracking of transportation logistics.
- Utilizing, scheduling, and managing the operational logistics of the ship.
The income derived could be in the form of revenues from sale of a good or service, royalties, interest, premiums, dividends and any other amounts generated from performing the above relevant activities in the UAE.
Corporate entities that are owned by the UAE government are excluded from the Regulations. UAE sovereign investment funds and any other UAE government related companies would not need to meet UAE economic substance requirements. Furthermore, a company is not obliged to meet and pass the economic substance test if it does not make income in relation to a relevant activity it carries.
WHAT ARE THE REGULATION REQUIREMENTS?
UAE onshore and free zone entities will need to meet and satisfy they have effective economic substance in the UAE, by passing the test in relation to the relevant business and activities. A company meets the economic test if it:
- Conducts “core income-generating activities” in the UAE.
- Is directed and managed in the UAE.
- Has an adequate number of full-time employees, expenses and physical assets for carrying out the business activity, in the UAE.
WHAT IS THE PROCESS FOR THE REPORTING REQUIREMENTS?
The relevant licensee has an obligation to annually prepare and submit the Economic Substance Report (Report) to the Regulatory Authority (to be determined by the Cabinet of Ministers’ resolution). The Report is to evidence that the licensee/entity satisfies the requirements and include information on the licensee’s relevant activities such as:
- Nature and amount of revenue.
- Place of business.
- Number of full-time employees with qualifications.
- Declaration on satisfaction of economic substance requirements.
WHAT HAPPENS IF A COMPANY DOES NOT COMPLY WITH THE REGULATIONS?
It is essential that all relevant entities comply with the Regulations.
- New entities – must comply with the Regulations once they receive the trade license, with the first return due in 2020 (or later).
- Existing entities – must comply with Regulations from 30 April 2019, with the first return due in 2020.
Failure to comply may result in:
Money Penalties – many businesses have already failed to meet the economic substance test and failed to demonstrate sufficient economic substance in their first reporting period and could be subject to a penalty of AED 50,000.
The fines increase to AED 400,000 for the subsequent fiscal year. Licensees with a year ended 31 December 2022 only have until 31 December 2023 to ensure that they meet the economic substance test. Additional penalties may apply for not providing relevant information, suspending, revoking or not renewing the UAE relevant entity’s trade license. Further, penalties of AED 50,000 will be imposed in case of not providing information or for inaccurate information.
Foreign Authority Disclosure – should the economic substance report indicate non-compliance with the Regulations, the UAE Ministry of Finance will disclose information of the licensee/entity to the foreign authorities in the country of the parent company and the country of residence of the ultimate beneficial owner.
WHAT IF A COMPANY OUTSOURCES TO THIRD-PARTY SERVICE PROVIDERS?
A company that outsources some of its activity to a third-party service provider must comply with the Regulations. Such third-party service providers must within their own right have sufficient presence in the UAE and be able to demonstrate it has enough supervision of the outsourced activities.
WHAT ARE THE RISKS RELATED TO ESR SERVICES IN THE UAE?
Through careful planning and professional advice, the minimal risks connected to Taxes in the UAE can be reduced. You can handle the Tax legislations and procedures easily with the assistance of professional consultants, ensuring adherence to legislations and reducing potential risks.
ESR IN BAHRAIN
The ESR in Bahrain apply to corporations, branches, and partnerships in Bahrain that are engaged in the following core income-generating activity (“CIGA”) relevant activities:
- Distribution and service centre.
- Holding company.
- Intellectual property (IP).
- Financing companies.
- Certain investment firms.
- Fund administrators.
The ESR is monitored and regulated by the Ministry of Industry, Commerce & Tourism (“MoICT”) and the National Bureau for Revenue in Bahrain. Entities conducting any of the above relevant activities are required to meet the ES test & assess the CIGA for each identified relevant activity category, prove they have commercial and managerial operations in the country, register on the International Tax Information Exchange System (“ITES”) portal and submit the economic substance return.
An entity in Bahrain will need to demonstrate and satisfy substantial economic substance by passing the test in relation to the relevant business and activities. A company meets the economic test if it:
- Conducts relevant “CIGA” in Bahrain.
- Has an adequate number of qualified full-time employees, physical offices, and operating expenses.
- The management are present in Bahrain; and have an adequate number of Board of Directors Meetings, certain number of the board are physically present in the country during the meeting, strategic decisions are made at the board meetings and recorded in the minutes of meetings kept in Bahrain; moreover, the board of directors must possess the appropriate knowledge.
Non-compliant entities with the regulations could be subject to one or more of the following actions:
- A warning notice.
- Suspension of Commercial Registration (“CR”).
- Criminal prosecution.
- Money penalty up to BD 1,000 per day.
- Striking off the trader from the CR.
ESR IN QATAR
On 17 October 2021, the Ministry of Finance issued Decision No. 20 of 2021 concerning ESR in Qatar which requires entities carrying relevant activities to demonstrate economic substance in Qatar as of 4 November 2021.
The following are considered relevant activities under the Regulations:
- Headquartered Businesses.
- Distribution and service centers.
- Financing and leasing.
- Fund management.
- Banking activities.
- Insurance activities.
- Holding company.
- Technical consulting.
- Technical training.
- Intellectual property activities.
Entities in Qatar need to meet and satisfy substantial economic substance by passing the test in relation to the relevant business and activities. A company meets the economic test if it:
- Conducts relevant “core income-generating activity (CIGA)”.
- Have an adequate number of qualified full-time employees and operating expenses.
- Fulfil any other requirements specified by the licensing authorities.
The relevant licensee has an obligation to annually prepare and submit the Economic Substance Report to the Regulatory Authority providing the following information:
- Place of business.
- Nature and amount of revenue.
- The annual investment volume in fixed assets.
- Number of full-time employees with qualifications and amount of their salary.
- Operating expenditure.
- Declaration on the satisfaction of economic substance requirements.
Penalties related to violations for ESR non-compliance and filing requirements will be determined by the authorities in due course.
NEXT STEPS & WHAT CREATION BUSINESS CONSULTANTS CAN DO TO HELP
It is vital that your business understands the economic substance requirements and the obligation to annually prepare the Report and file it with the Relevant Authority.
Creation Business Consultants can help you get a clear understanding of the requirements that could potentially apply to your Company. Creation provides a full range of services including company secretarial services and other outsourced services and packages bespoke for all entities. It is important that you look at key areas of your operation that the Regulations may impact concerning corporate structuring and tax aspects and to ensure to comply with the Regulatory standards. Please feel free to contact our corporate services team at [email protected] or +971 4 871 4142 should you require a quotation for a corporate structure assessment report and assistance.