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The Dubai Chamber of Commerce.

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Economic Substance Regulations in UAE: What you should know

 

DUBAI – Economic substance regulations (ESR) have been introduced in UAE since April 2019, requiring businesses to assess the impact of new legislation to them.

ESR has been introduced in other countries across the globe in order to fully comply with international initiatives targeted at combatting harmful tax practices.

In essence, ESR requires certain businesses in UAE to demonstrate that they’re carrying out substantial economic business activities within the region.

Why are the regulations for economic substance important?

The UAE’s ESR requires businesses in assessing whether the new legislation applies to them. If so, the businesses that are relevant have to implement strategies in preparing for the reporting and notification requirements of local authorities.

Failure to comply to the regulations, including failure in providing the regulatory authority notification regarding economic substance and applicability of the regulations result in penalties and fines of up to Dhs50,000. Although the penalties for not complying to the legislation will be imposed on a much later date, a business that fails in implementing compliance strategies would find it to be best to avoid them.

Does my business have to comply with ESR in UAE?

Any business entity that is licensed in UAE in carrying out relevant activities as per the legislation, whether in a UAE free zone, onshore, or any financial free trade zone, would have to comply with ESR.

Relevant activities as per the legislation are as follows:

● Company headquarters
● Centres for distribution and service
● Intellectual property
● Holding company
● Shipping company
● Investment fund management
● Lease financing
● Banking
● Insurance

More info on relevant activities for ESR

The definitions for service centre and company headquarters are very broad and can capture a lot of businesses in the country unaware of the applicability of the legislation. Any entity licensed by authorities which has to deal with any related entity that is stationed overseas has to seek professional advice regarding Economic Substance Regulations.

Lease financing, investment fund management, insurance, and banking

If an entity has been licensed by any relevant licensing authority in UAE in carrying out any of the activities mentioned above, it has to comply with ESR.

Shipping

Shipping businesses have to comply as well with ESR, and that includes businesses that are in operation of ships anywhere outside the territorial waters of UAE. The ESR applies to you if you are in shipping business and conducting nay of the activities listed below:

● Management of a crew for a ship
● Shipping, using/maintaining/renting out of shipping containers
● Selling of tickets for travelling and other ancillary services
● The transportation of animals, goods, mail or people by sea

Holding company

A holding company holds equitable interests or shares in other businesses, earns dividends, and also capital gains from the shares. a holding company doesn’t carry out any other commercial activities that are within the ESR’s scope, which means it can have less requirements for compliance.

A holding company which generates profit from activities that are other than dividends and capital gains and holding assets like real estate don’t fall within the category as per the guidance released by the Ministry of Finance on economic substance. The company will have to examine thoroughly on whether it falls under any of the categories other than holding company like service center or company headquarters.

Intellectual property

A business that is licensed in UAE to receive income from IP assets which include, but aren’t limited to brands, patents, marks, and copyrights, are within the scope of ESR.

Headquarters business

Whether or not businesses are deemed to be company headquarters won’t depend on the position of the businesses in their respective groups. Instead, it will be on if they provide services to the groups.

Entities that provide any of the services below to one or more entities overseas fall in the definition:

● Provision of advice that is related to control or assumption of risk
● Control/assumption of material risk that’s for activities which are carried out within UAE and/or overseas
● Provision of a senior management

Center for distribution and service

Although definitions for service and distribution have been clumped in ESR guidance released by Ministry of Finance in UAE, they’re quite different businesses. a service centre’s definition has potential in bringing lots of companies within ESR’s scope. A service center, as per the official guidance, is a business which provides services to connected persons, which are entities that are related to the business through indirect or direct control or ownership.

In the UAE, ESR regulations can apply to majority of businesses with operations in the country. Are you confused as to whether the legislation is actually applicable onto your business? Click here for more details. SC/Expat Media


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