10 August 2020, the UAE Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020, which repeals and replaces Cabinet Resolution No.31 of 2019 and introduces significant changes to the scope and application of the UAE’s Economic Substance Regulations (ESR).
The amended ESR apply as of 1 January 2019 and require entities to reassess their position and resubmit their 2019 financial year notifications by the end of 2020. The UAE Minister of Finance also issued an updated guidance on 19 August.
The new regulation introduce ‘exempted licensees’ as a new category of licensee under the ESR, which include: investment funds; licensees that are tax resident in another jurisdiction; and branches of a foreign entity of which the income from the relevant activity is subject to tax in a jurisdiction other than the UAE. In order to enjoy their exempt status for ESR purposes, exempted licensees need to file a notification and provide documentary evidence demonstrating such position.
The UAE Federal Tax Authority (FTA) has now been appointed as the National Assessing Authority, with powers to:
- Assess whether licensees have met the economic substance tests;
- Impose administrative penalties for non-compliance;
- Hear and decide on appeals filed by licensees, among others.
Resolution 57/2020 has increased the size of administrative penalties for non-compliance. The penalty for failure to submit an ESR Notification has been increased from AED10,000 to AED20,000, while penalties for submitting inaccurate information, failing to submit the Economic Substance Report or failing the economic substance test have been increased to AED50,000.
Resolution 57/2020 further makes changes in respect of relevant activities in the UAE and what licensees performing such activities must demonstrate in terms of sufficient economic substance. These include clarifications relating to the relevant activities of distribution and service centre businesses and high-risk IP businesses.
The deadline to submit the Economic Substance Notification is six months after the end of the financial year. Licensees that have already submitted their notification are required to re-submit them via the Ministry of Finance portal. The Economic Substance Report should be submitted within 12 months after the end of the financial year. The format of the report will be published by the National Assessing Authority.