Defining the paramater of ‘economic substance’ in UAE's new law
Foreign-owned businesses will need to offer more transparency to pass UAE’s ESR benchmark
The UAE has been a tax haven - but since it was included in the “grey list” by OECD in 2017, the government has undertaken as a priority the introduction of AML (anti-money laundering) and CFT (combating the financing of terrorism) regulations. It has introduced stringent KYC (know our customer) and due diligence to tighten the banking system. The recently issued Economic Substance Regulations (ESR) to curb harmful tax practices and to be in sync with the global standard set by the OECD’s Forum on Harmful Tax Practices (FHTP), which requires companies to have substantial activity within its jurisdiction.
This means the need to have offices, expenditure, presence of staff and board of directors. And now, the National Economic Register (NER) administered by the Ministry of Economy will publicly have names of investors termed as “responsible manager” to bring about more transparency and in line with best international tax jurisdictions.
A vital database
The National Economic Register is a federally supervised online platform that aims to adopt the tools of a knowledge-based economy by providing accurate, comprehensive, and instant data on existing economic activity related licenses in the UAE. The Ministry of Economy will make available all the vital information about such licenses, statistics, activities and reports into the public domain.
That means NER will enable banks and other interested parties to get immediate and complete information, including that of a company’s directors, managers or partners.
Ease of use
Through NER, one may inquire about a business license by entering a trade name, trade license number or the Economic Register Number.
Certainly, established companies with long track record will not have any issues with the increased transparency. In fact, NER will bring about a level of transparency that banks and customers can make full use of before considering any loan or striking a business deal. Furthermore, NER can help prevent or reduce the possibility of financial scams.
Tightening up
But the NER is not good news for foreign investors who want to evade taxes in their home countries and who will want to hide their identity here.
Raising the oversight
Strict AML-CFT has shrivelled the ways and means for those businesses carrying out high-risk activities. Apart from that, access to banking has become difficult even for existing business engaged in trade with high-risk countries.
The ESR requirements will increase the cost and administrative work, by way of additional reporting requirements, to pass the Economic Substance Test for the existing business. It could be the end of the road for companies subject to ESR but don’t have “economic substance” in the UAE.
- Jitendra Gianchandani is Chairman of JCP.