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Cabinet Resolution Number 57of 2020 concerning Economic Substance Regulations (the “ESR”)

Cabinet Resolution Number 57of 2020 concerning Economic Substance Regulations (the “ESR”)

The UAE Cabinet issued a new resolution concerning Economic Substance Regulations. This resolution aims to replace the old Regulations, making it redundant.  On 23rd September, 2020, the Ministry of Finance (MoF) announced the details of the Cabinet Resolution in consensus with the Organisation for Economic Cooperation and Development (OECD) and the European Union Code of Conduct Group.

The key amendments in this resolution are enumerated as follows;

  1. Under the purview of the MoF, a new centralised online portal has been created that allows ease of access to entities who wish to submit ESR notifications. All ESR submissions shall be submitted therein, henceforth.
  2. Further, the duty to assess compliance and enforcement thereof lies with the UAE FTA. 
  3. The new ESR limits the definition of a licensee to juridical persons and unincorporated partnerships that are registered to carry out relevant activities. This therefore implies that, natural persons, sole proprietors, trusts and foundations are no longer subject to the ESR.
  4. The ESR also defines High Risk IP Licensees as businesses that meet the following conditions; the entity did not create the IP asset, the entity acquired the asset from a connected person or in consideration from funding research and development for an individual situated in a foreign jurisdiction, the asset has been sold to a connected person through a business license, or earns separately identifiable income from the foreign connected person with respect to exploitation of said asset.
  5. The new ESR further provides for exemptions with respect to entities to whom filing requirements such as, filing an ESR Report and meeting the requirements of the Economic Substance Test, do not apply. A list of exempted licensees has been provided in the new ESR wherein UAE companies that are tax resident outside the UAE, entities wholly owned by a UAE resident, branches of foreign companies in UAE are exempted from the requirements. Earlier, entities that were majority-owned (51% or more) were excluded, however, now such entities are no longer exempt.
  6. With respect to any entity applying for an exemption on grounds that they are already subject to tax outside UAE, the MoF shall share details with foreign competent authorities thereof.
  7. Further, the ESR provides for activities that may be outsourced, as well as the requirements that shall apply to such outsourced activities.
  8. The ESR further also sets out fixed amounts of administrative penalties for violations of the regulations as opposed to the previous regulation that laid down a range of amounts that could be imposed as a penalty.