INTRODUCTION
We are pleased to present the latest edition of
- The '
Focus Point ' covers an overview of the Economic Substance Regulations in theUAE . - Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
-
Our 'Tax Talk' provides key updates on the important tax-related news from
India and across the globe. - Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
We hope you find our newsletter useful and we look forward to your feedback.
Economic Substance Regulations (ESR) - Strategic analysis for businesses in
The
2019 was the first year of compliance, wherein businesses in
In relation to the Indian headquartered companies with a presence in the
Particulars | Due Date |
e-filing of ESR notification for the financial
year ended on | |
e-filing of ESR Annual report for the financial
year ended on |
It is assumed that the accounting year followed by the
Applicability
ESR applies to all private/public shareholding companies, joint venture companies, partnership firms, etc. In other words, the Regulation does not cover individuals, sole proprietorship, trust, or a foundation under its ambit. There are certain exemptions to Licensees from ESR regulations which inter-alia includes Investment Funds, a company that is a tax resident outside the
Key parameters for Economic Substance Test
Licensee must satisfy the following criteria to meet the Economic Substance Test:
Core Income Generating Activities (CIGA)
- Need to justify that Licensee conducts CIGA
-
CIGA need to be conducted in
UAE - Regulations provide an inclusive list of CIGAs - Need to identify what additional could be considered
Directed and Managed
- Need to hold a board meeting in
UAE - Frequency/number of such meetings would depend having regard to decisions to be taken
- Quorum of physically present
- Minutes to be maintained and signed by directors
- Directors should have the necessary knowledge/expertise
Employee/Assets/Expense
Need to demonstrate 'Adequacy' Test for:
- Employees - No. of qualified full-time employees physically present in
UAE -
Assets - Adequate physical assets in
UAE -
Expense - Adequate operating expenses incurred in
UAE .
Relevant businesses activities
The relevant activities subject to economic test are listed as under:
- Banking business
- Investment fund management business
- Headquarters business
- Holding company business
- Distribution and service center business
- Insurance business
- Lease-Finance business
- Shipping business
- Intellectual property business
Compliance requirement
Notification to be submitted
Licensee shall annually notify the Authority which inter-alia includes the following:
- Whether or not it is carrying on Relevant Activity;
-
If yes for above, gross income for Relevant Activity is subject to tax outside
UAE ; - Financial year followed by Licensee;
- Details of Branch.
Report to be submitted
If Licensee is carrying out Relevant Activity, it is required to submit a detailed report annually within 12 months from the end of the financial year, containing various operations related information, including but not limited to employee details - experience, type of contract, qualifications, duration of employment, etc. and information on intangible related details of the Licensee.
Penalty for non-compliance
The Resolution has prescribed the following offenses and corresponding penalties as under:
Offenses | Quantum of penalty |
Failure to meet Economic Substance Test/submit ESR annual return (First year) | AED 50,000 |
Failure to meet Economic Substance Test (Subsequent Year) | AED 400,000 |
Failure to submit the Notification and any other relevant information/documentation | AED 20,000 |
Additionally, the penalty included sharing information with the
Governance mechanism
The
Way Forward
- Recently,
UAE has introduced Country-by-Country- Reporting (CbCR) Regulations in line with its commitment to implement Base Erosion and Profit Shifting (BEPS) standard for Action Plan 13. Now, with the introduction of ESR,UAE has most certainly sent a positive signal to the sovereigns of its trade partners in other jurisdictions. - Based on the filings of year 1, the concerned authorities have started issuing notices in the situation of noncompliance with the ESR Regulations.
- Despite the regulations providing useful guidelines, the Licensees will require a lot of judgment in a professional capacity to determine if the activity meets the substance test. It is recommended that multinationals be proactive and revisit their existing operational activities to mitigate/ avoid the potential risk of non-compliance with the above regulations. With this being the subsequent year of Regulations, it would be relevant to check and maintain consistency with respect to the positions adopted by the Licensee in the previous year.
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