Economic Substance Regulations in UAE

Transparency has been high on government agendas since the global financial crisis and this has resulted in the introduction of a number of tax transparency and anti-avoidance measures across the world.

The adoption of Organization for Economic Cooperation and Development (OECD) Common Reporting Standard (CRS) introduced automatic exchange of tax and financial information on a global level. This was a game-changer, providing for the international exchange of account holder information and introducing a new level of transparency.

The OECD then turned its attention to combatting Base Erosion and Profit Shifting (BEPS) – multinational enterprises exploiting gaps and mismatches between different countries’ tax systems to ‘shift’ profits from higher-tax jurisdictions to lower-tax jurisdictions and thereby ‘eroding’ the tax bases of higher-tax jurisdictions.

In April 2019, the UAE issued the following legislation to introduce Economic Substance Regulations (ESR) to comply with OECD’s BEPS Action plan and tax reporting framework of European Council (EU). 

  • UAE Cabinet Resolution No. 31/2019, as amended, concerning economic substance regulations in the UAE;
  • guidance released by the Ministry of Finance pursuant to Ministerial Decision No. 215/2019; and
  • Cabinet Resolution No. 58/2019, which designates the appropriate UAE authorities to regulate compliance under these regulations.

Objective

The primary purpose of the Economic Substance Regulations (ESR) is to ensure that the entities which undertake relevant activities are not used to artificially attract or shift profits that are not proportionate to the economic activity undertaken in the UAE by setting up the criteria that confirm that the Licensee is carrying out an activity in the UAE that achieves economic substance interest.

Who are subject to the Economic Substance Regulations?

The Economic Substance Regulations apply to all UAE Companies including onshore and free zone companies, branches, foundations, non-profit organizations and partnerships (referred to as “Licensees”) that carry out one or more of the following “Relevant Activities” in the UAE:

  • Raising of funds, managing risk, managing credit, currency as well as the interest risk
  • Taking suitable hedging positions
  • Issuing loans, providing credit or other financial services.
  • Managing capital and preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business.
  • Risk calculation and prediction.
  • Issuance of insurance and reinsurance of risk.
  • Underwriting insurance and reinsurance
  • Decision making on purchase and sale of investment instruments.
  • Calculation of risks and reserves .
  • Taking decisions on currency or interest fluctuations and hedging positions
  • Preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business
  • Negotiating and optimizing funding terms and conditions
  • Identifying and acquiring assets that are to be leased
  • Finalizing the terms of leasing and financing
  • Managing and revising the financing terms or leasing agreements. Risk Management of the afore mentioned agreements.
  • Making relevant management decisions
  • Making decisive expenses as deemed necessary by all entities in the group.
  • Coordinating and managing the activities of the group.
  • Managing crew by means of hiring, overseeing and paying crew members.
  • Overhauling and maintenance of ships.
  • Tracking deliveries and general management including overseeing operations.
  • Determining what goods to order and when to deliver them, organizing and overseeing voyages

The CIGAs of a Holding Company Business are all activities related to acquiring and holding shares or equitable interests in other companies, provided that such activities do not constitute another Relevant Activity, in which case, the CIGAs shall be those related to that other Relevant Activity.

IP Assets are defined as any intellectual property right in intangible assets, such as copyrights, patents, trademarks, brands, and technical know-how, from which the Licensee earns separately identifiable income in the form of royalties, license fees, franchise fees, capital gains and any other income from the sale or exploitation of the Intellectual Property Asset.

  • Transportation and storage of goods, multiple components and materials
  • Stock Management
  • Order management
  • Consulting services and other administrative services


How can Hexagon assist you?

We can assist you in this regulatory self-assessment to fulfill your compliance with legal responsibilities by:

  • to get a clear view of the new regulations and your entity’s categorization
  • reviewing internal corporate governance, Management information system and ESR criteria fulfillment
  • identifying Shareholding pattern of the company, Foreign Connected Persons, Relevant Activity, Income generated from such relevant activity and whether this income is taxed anywhere Outside the UAE.
  • enables you to implement the most effective compliant (implementing contractual and delegation arrangements) strategy to help you pass the economic substance test
  • Providing you with corporate secretarial services and fulfilling your needs at the light of the new regulations.