ABU DHABI - The Ministry of Finance, MoF, announced today the details of the Cabinet Resolution No. (57) of 2020 concerning Economic Substance Regulations, ESR.

The Resolution was issued in consultation with the Organisation for Economic Cooperation and Development, OECD, and the European Union Code of Conduct Group, in order to direct companies that engage in one or more relevant activities.

Younis Haji Al Khoori, Under-Secretary of MoF, noted that any company that is subject to the economic substance regulations must adhere to the resolution’s provisions.

"This resolution resulted from constructive consultations undertaken by the UAE with its partners in the European Union and the OECD. This reaffirms the UAE’s commitment to adhere to tax policies, apply international taxation standards, and address tax evasion," he added.

Under this resolution, the Federal Tax Authority, FTA, has been appointed as the National Assessing Authority for the purposes of the Economic Substance Regulations. In this capacity, the FTA will be primarily responsible for assessing whether the Emirati establishments and companies have met the requirements of the Economic Substance Test. The regulatory authorities will continue to be responsible for the collection and verification of information regarding their Licensees and shall assist the FTA in carrying out its role as the National Assessing Authority.

According to the resolution, the definition of a Licensee has been amended to be limited to juridical persons and unincorporated partnerships that are registered (whether by way of commercial/trade licence or other form of permit) to carry out a Relevant Activity. Natural persons, sole proprietorships and other business forms that are not juridical entities are no longer within the scope of the UAE economic substance regulations.

The UAE Economic Substance Regulations provides a list of entities that are exempt from the requirements to file an ESR Report and meet the Economic Substance Test. The ‘Exempted Licensees’ include the UAE companies that are tax resident outside of the UAE and Investment Funds and their underlying SPVs / investment holding entities. Wholly UAE resident-owned businesses that are not part of a multinational group and that only carry out business activities in the UAE, as well as UAE branches of a foreign company – if the Relevant Income of the branch is subject to tax in the foreign jurisdiction are also included.

The UAE companies that are majority (51 percent or more) owned by the UAE government are no longer exempt from the UAE Economic Substance Regulations.

The definition of a ‘Distribution and Service Centre Business’ was also amended, and currently includes businesses that purchase raw materials or finished products from a foreign group company and distributes them to related or unrelated parties in the UAE or elsewhere, irrespective of whether such raw materials or finished products are imported into the UAE; and/or businesses that provide services to a foreign group company, without the previous requirement that the provision of services is in connection with the foreign group company’s business outside the UAE.

A ‘High Risk Intellectual Property Licensee’ is defined as an Intellectual Property Business that meets all the following conditions: the business did not create the Intellectual Property Asset; the business acquired the Intellectual Property Asset from either a connected person or in consideration for funding research and development by another person situated in a foreign jurisdiction; the business licenses sold the Intellectual Property Asset to a Connected Person, or earns separately identifiable income from a Foreign Connected Person in respect of the use or exploitation of the Intellectual Property Asset.

The Cabinet Resolution No. (57) of 2020 amends and repeals Cabinet Resolution No. (31) of 2019 concerning Economic Substance. More information about the new directives on economic substance regulations in the UAE are available on MoF’s website: https://www.mof.gov.ae/ar/Realistic-economic-activities

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