UAE has implemented ESR Regulations in 2019. The ESR Regulations are issued following the global standard set by the Organisation for Economic Co-operation and Development (“OECD”) Forum on Harmful Tax Practices and the European Union Code of Conduct Group (“EU COCG”), which lists specific requirements for businesses to demonstrate that their actual economic activity is in UAE, and it is not driven solely to benefit from a low or non-tax jurisdiction. Thus, preventing the harmful tax practice of profit shifting from high-tax jurisdiction to low tax regimes.
One of the requirements to demonstrate economic substance is that a Licensee undertakes the Core Income Generating Activities (CIGA) in relation to its Relevant Activity (or Relevant Activities) in the UAE. The CIGAs are those activities that are of central importance to the Licensee for the generation of the gross income earned from its Relevant Activity.
a. Distribution Business
Most trading, manufacturing, and other similar businesses fall into this category.
A Licensee is considered to be engaged in ‘Distribution Business’ if it:
and
b. Service Centre Business
A Licensee is considered to be engaged in ‘Service Centre Business’ if it provides:
Lease-Finance Business includes Licensees engaged in offering credit or financing for any kind of consideration, such as:
Headquarters Business refers to a Licensee that provides services to foreign group companies through which:
or
A Licensee must operate one or more ships in international traffic, for the transport of either passengers, cargo or both.
A Licensee to be considered as a Holding Company Business:
and
A Licensee is considered an Intellectual Property Business:
if it holds, exploits or receives gross income from ‘Intellectual Property Assets, that is any:
from which the Licensee earns separately identifiable income in the form of:
Investment Fund Management Business encompasses Licensees that provide discretionary investment management services in relation to domestic or foreign Investment Funds.
Licensees undertaking a Banking Business would generally be licensed as a “Commercial Bank”, or an equivalent licensing category that allows for the acceptance of deposits.
Licensee carrying out Insurance Business implies the business of accepting risks by effecting or carrying out contracts of insurance, in both the life and non-life sectors, including contracts of reinsurance and captive insurance arrangement.
All Licensees and Exempted Licensees must submit the ESR Notification within 6 months from the Licensee’s financial year end. Following which, all Licensees must submit the ESR Report within 12 months from the Licensee’s financial year end.
Entities are expected to use a ‘substance over form’ approach to determine whether they undertake a Relevant Activity and as a result will be considered Licensees for the purpose of ESR Regulation, irrespective of whether such Relevant Activity is included in the trade license or permit of the entity.
The Regulations as amended on 10th August 2020, exempt certain entities (“Exempted Licensee”) from fulfilling the requirements under the amended Regulations. However, they are required to file the notification along with documentary evidence claiming eligibility for exemption status.
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The Economic Substance Regulations bring specific requirements for businesses to demonstrate that their actual economic activity is in UAE, and it is not driven solely to benefit from a low or non-tax jurisdiction.
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