The UAE’s amended ESR (Economic Substance Regulations) has classified entities into ‘licensee’ and ‘exempted licensee’ to carry out relevant activities.
The nine relevant activities are banking, insurance, shipping, lease-finance, investment fund management, intellectual property, headquarters business, holding company business, and distribution and services.
The licensees have to file ESR reports along with documents to avoid the administrative penalties. However, exempted licensees need to file notifications only, along with the documents to substantiate their exempt status to be excluded from the ESR.
Keep filing them
If an entity fails to provide sufficient evidence to substantiate its status as an exempted licensee, it will be assumed as a licensee and will have to meet the Economic Substance test and file the report.
It is also possible that if an entity is not subject to ESR in one year may become one in subsequent years. This requires each business to assess their ESR status every year. The amended law is clear in that one should look beyond the trade license and the MoA (Memorandum of Association) while assessing ESR applicability.
It means an entity not carrying out relevant activity as per the trade license. Say, a chain of supermarkets that may be subject to ESR if it provides loans to group companies with or without interest.
Also, an entity engaged in trading of electronics may be subject to ESR if it purchases goods from its foreign group company and sells in the UAE or outside.
There are five categories of exempted licensees and they are required to file documents to substantiate their status:
* The exempt licensee must be wholly-owned by a UAE national or UAE resident but is not part of a multinational group. Also, the licensee must only have operations in the UAE.
They must provide a shareholder register, structure chart, proof of nationality and/or residency of shareholder(s), and copy of financial statements.
* An investment fund is required to file a copy of statutory documents, copy of the PPM/information memorandum, copy of investment fund’s license and registration (for a fund established in a jurisdiction outside the UAE).
* A special purpose vehicle (SPV) or holding company of an investment fund should submit a structure chart of the fund and its subsidiary investment entities. Or evidence of the investment fund status of the fund that has incorporated the UAE entities.
* An entity that resident outside the UAE should submit details of the country in which the it claims to be a tax resident, tax identification number issued by the country, and a letter or certificate of an assessment to corporate income tax and evidence of its payment.
* A UAE branch of a foreign company and all of its income are subject to tax in the jurisdiction of that foreign company. Then, it should submit details of the country in which the parent company is resident for tax purposes, tax identification number issued by a relevant foreign tax authority, and copy of the tax returns.
- Jitendra Gianchandani is Chairman of Jitendra Consulting Associates.