Background of Economic Substance Regulation:
The genesis of one of the most talked about business regulation these days in the United Arab Emirates (UAE) i.e. Economic Substance Regulation (ESR) lies in the Resolution of European Union (EU) on December 1, 1997. The Resolution was aimed to restrain the tax competition through a code of conduct for business taxation. The Resolution also mandated the creation of a Code of Conduct Group (COCG) to devise the policy framework and assess the non-cooperative jurisdictions for the tax purposes.
The COCG conducted the extensive investigations into jurisdictions and made assessment as per the below-mentioned international standards of good governance:
Automatic or on request exchange of information as per international standards.
Accession to OECD's multilateral convention or signed bilateral agreements with all EU Member States to facilitate such exchange.
Fair Tax Competition:
No have harmful tax regimes.
No facilitation to the offshore structures which attract profits without real economic activity.
Implementation or commitment to implement the Base Erosion and Profit Shifting (BEPS) minimum standards set by the Organization for Economic Co-operation and Development
(OECD), starting with Country-by-Country Reporting.
Based on the assessment result, COCG on December 05, 2017 published a list of the jurisdictions found non-cooperative for the taxation purposes. The list contained bifurcated the non-compliant jurisdictions into two categories i.e. Blacklist Jurisdictions (Non-Cooperative Jurisdictions) and grey list Jurisdictions (Jurisdictions committed to implement the good tax governance principles and being monitored). COCG placed the UAE along with the other 16 countries in blacklist on December 05, 2017 on account of concerns such as allowing the offshore companies and structures to make profits in violation of principle of Fair Tax Competition, shifting profits for No or only Nominal (NOON) Tax, lack of transparency and exchange of information.
Promulgation of Economic Substance Regulation in the UAE:
In order to address the concerns of COCG, UAE joined the OECD Inclusive Framework on BEPS in May 2018. UAE committed to introduce the minimum standards of good governance as proposed by the COCG by the end of 2018. UAE in order to meet its obligations as per commitment made to the COCG, promulgated the Resolution No. 31 of 2019 concerning the Economic Substance Regulations in the UAE (later amended by Cabinet Resolution No.57 of 2020 in August 2020). Consequently, UAE was removed from the COCG blacklist on March 19, 2019 and placed in the greylist, hence, will have to continue to display its strict compliance with the EU standards on transparency and cooperation.
Significance of Compliance with Economic Substance Regulation for the UAE Businesses:
The ESR regulation implemented in the UAE, requires the UAE based businesses (onshore and offshore) to carry out the self-assessment whether the newly introduced regulations apply to them or not. As a result of the self-assessment, business found carrying out the business activities falling within the ambit of the Relevant Activities defined under the ESR are under obligation to satisfy the mandatory Economic Substance Test and do the necessary reporting.
UAE based business (Licensees) need to do take the following measures to be in compliance with the ESR:
Satisfy Economic Substance Test:
Conducting Core Income- Generating Activity (“CIGA”) in the UAE.
Relevant Core Income- Generating Activity managed and directed in the UAE.
Adequate work force physically present in the UAE and carrying out the Core Income- Generating Activity in the UAE or outsourcing the Core Income Generating Activity to third party service providers, and their activities, employees, expenditure and premises located in UAE.
Adequate physical assets in the UAE.
Monitoring and controlling the Core Income- Generating Activity in case it is outsourced.
Businesses carrying out the relevant business activity must notify to the concerned authorities that which of the relevant activities it had carried out during the last financial year by filing the ESR Notification. Reporting business also disclose in the ESR Notification whether it earned any income by carrying out the Core Income- Generating Activity or not. In case of affirmative, the businesses require to do the advanced reporting by filing the ESR Report.
Consequences of Non-Compliance with Economic Substance Regulation:
Failure or omission (non-submission, submission of inaccurate and incomplete information) to comply with the requirements of the ESR by the businesses falling under the scope of the regulation may be subject to monetary penalty of AED 10,000/- to 50,000/- during the first financial year. However, in case of repeated non-compliance, the amount of monetary higher amount and also result in the suspension, revocation or denial to renew the business license.
Why use Freemont Oneworld Group for your ESR reporting?
Freemont Oneworld Group merger between Freemont Group, founded in 2001 and operating in Dubai since 2006, and Oneworld Mideast, a subsidiary of the prestigious corporate service provider Oneworld, active in Cyprus for over 30 years. We are an established Company with a vastly experienced team of members who are passionate professionals ready to help your business grow in UAE. The team, apart from standard services offered by any corporate service provider, can advise you on the right structure for your business and connect you with financial institutions to set up your banking operations with ease.