The New Law In A Nutshell

The new law has made the procedures regarding the branch operations and the prescience of the board of directors explicitly clear. With the new regulations gaining momentum, it is necessary to explain that these are not a tax but a  means of determining that entities in the UAE are adopting the relevant measures with an excellent economic substance, directed and supervised through the required assets and qualified staff. Significant changes have been incurred in the Economic Substance Regulations with cabinet resolution No. 57 of 2020, along with a ministerial decision 100 of 2020. Now the UAE businesses must be aware of these amendments to reassess the fallout and their compliance position.

The Scope Of The New Regulations

The amended part is now meant to cover the juridical persons who represent the unincorporated partnerships. It has excluded trusts, foundations, and sole proprietors. There are currently four categories of licenses that are now under an exemption from the new regulations. These are the

–         Investment funds

–         Licensee happening to be a tax resident in a foreign jurisdiction

–         An entity in case its income is taxed in a foreign jurisdiction

Entities are wholly owned by UAE nationals and residents but not a part of a multinational group. However, its business operations must be in the UAE

These exemptions will provide massive relief for local businesses in the country.

Branch Operations And FTA

The situation has been made clear on businesses with multiple branches in the country and foreign branches of an entity in the UAE. The entities that have been taking the relevant measures but did not make an income are also explained.

The purchase of goods from a foreign entity and the reselling of these goods have also been covered.

A major change that has taken place relates to the appointment of FTA or the Federal Tax Authority, which will be carrying out assessments to determine compliance by the entities. The body will be entrusted to offer administrative penalties, undertake an appeal process, and other functions.

The Ministry of Finance will launch an online portal that will oversee the submission of ESR notifications and reports along with other documents.

Ensuring Compliance

Businesses will now be required to submit ESR notification and report within 6 to 12 months, which would be considered applicable from the end of the company’s financial year. The board members oF the business will not be required to be practically UAE residents but must be in the UAE territory when undertaking strategic decisions.

There are strict penalties for non-compliance, which range from DH 20,000to Dh 50 000. It may be further increased to Dh 400,000 and may also lead to cancelation or suspension of trade license.

Advice For Businesses

Since the period for preparing a detailed ESR report and submitting the ESR notification is limited, businesses must reassess the implications that will be entailed through the amended ESR.