ESR has been implemented in nations with little to no corporate taxation, in order to cooperate with foreign efforts to address adverse tax activities like illegal avoidance to evasion. ESR allows such legal organizations to show that they carry out substantive commercial operations in these jurisdictions, in compliance with the Commercial Material Test.
The Economic Substance Regulations of the UAE are again gathering steam. Although not a levy, it seeks to define the required 'economic substance' for UAE organizations carrying out 'related operations' and to be directed and monitored and to provide sufficient funds, services, and professional persons in UAE.
The ESR has lately been granted major changes by cabinet resolution Number 57 of 2020 and ministerial decision 100 of 2020. In order to reevaluate the repercussions and where they are on implementation, the UAE companies should take notice of the amendments.
What are the relevant activities under ESR?
Economic Substance regulations enforce related activities:
- Banking firms
- Companies insurance
- Company Lease-Finance
- Companies Headquarters
- Shipment Firms
- Corporate investment firms
- Enterprises in property rights
- Company Hub for Sales and service business centers.
- Control of investment fund firms
The ESR Related Activities Reference, for example, presents that UAE companies can use a substance over type approach to decide if they are engaging in a "relevant activity" and thereby come within the framework of the Economic Substances Act. To draw this conclusion, Licensees must regard not just the act listed in their business licenses or certificates of registration, but also the activities performed over an economical period. It is not necessary, as per the Ministry of Finance, for an operator to be deemed to take on a related business operation in any of the divisions above. In either of those related operations, even passive revenue is seen as performing the operation.
Requirements within ESR?
Any Licensee undertaking several of the related activities shall apply a notice as defined in the Economic Substances Regulation to the applicable regulatory authority. For each financial year of each operator carrying out one or more of the Related operation and profits generated from the Related Operation in the UAE, it shall also be necessary, within 12 months from the close of the specific financial cycle, to fulfill a check on economic substance and send an economic substance summary to the applicable regulatory authority. An exception extends to corporations operated by the federal government, Emirate government, or UAE government departments, explicitly or implicitly, at least 51 percent.
Furthermore, when a corporation participates in a specific (even passive) operation and receives revenue from that operation, it has to update the corporate governance system to decide whether the market content test fits the criteria.
We believe that the relevant detail and guidelines will shortly be issued by the other regulators whilst certain government regulators have revealed the deadline and given advice on the notice filing procedure. We should proceed to watch and endorse such changes in any concerns about an agreement with the legislation on Economic Substances.