The UAE’s economic substance regulation has received momentum once more recently significant changes for made to the ESR through cabinet resolution and ministry decision, the amended ESR is positive and the UAE businesses should take note of the amendments to reassess the implication and where they stand on compliance.
The amended ESR covers judicial persons or unincorporated partnerships, while natural persons possibly include sole proprietors, trusts and foundations are now excluded. Four categories of licences has been specifically exempted from the ESR covering investment funds, a licensee that is tax resident in a foreign jurisdiction, and a UAE branch of a foreign entity if the branches income is taxed in a foreign jurisdiction.
The exempt category also consists of entities utterly owned by the UAE residents or nationals, and isn’t a part of a multinational group, provided it carries out businesses in UAE. This is a significant relief for neighbourhood companies within the UAE.
All exempted licences have to post only the ESR notification, along with prescribed documents on an annual basis. Clarity has also been provided on businesses with multiple branches within the UAE, foreign branches of a UAE entity and entities that undertook the relevant activities but did not earn any income. On the original ESR coverage under the DNSC business businesses required.
- A. Purchasing of goods from a foreign connected Person
- B. Importing and storing those goods in the UAE
- C. Reselling the goods outside the country.
With the removal of condition B and C, purchasing of goods from foreign group companies for international distribution, typically referred to as bell to ship to transactions or for local distribution within UAE would trigger ESR compliance and other audit firms in uae.
Another welcome change is the introduction of the concept of group to identify foreign connected person and link it with the requirements to prepare consolidated financial statements. A landmark change that has been seen is the appointment of the federal tax authority as the National assessing authority, the FDA will be responsible for the administrative penalties and the appeal process and other prescribed function for ESR along with VAT and excise tax ESR notification and report should be submitted within six and 12 months respectively, calculated from the end of the company’s financial year, typically December, March or June.
It has been clarified that the board members of the businesses they not be UAE resident but must be physically present in the UAE when taking strategic decisions. Increased and stringent penalties for non compliance could range from Dirham 20,000 to Dirham 50,000 for the increasing to Dirham 400,000 and possibly cancellation and suspension of trade licence. Considering that limited time is available to prepare a detailed ESR report and resubmit or submit ESR notification it is strongly recommended that businesses reassess the implication under the amended ESR