To prevent base erosion and profit shifting, the UAE, being a member of the Organisation for Economic Cooperation and Development (OECD) inclusive framework, promulgated revised ESR law (the Law) under the Cabinet Decision No. 57 of 2020; and related guidance (the guidance) under the Ministerial Decision No. 100 of 2020. The purpose of the law is to ensure that UAE entities do not artificially attract profits that are not commensurate with the economic activities undertaken by them in the UAE.
The ESR applies to nine specific business activities, including banking, insurance, investment fund management, lease finance, headquarters, shipping, holding companies, intellectual property, and distribution/service sector businesses. Entities not engaged in these activities are not subject to the ESR. Moreover, the ESR law applies to juridical persons, referred to as “licencees,” with the exceptions such as investment funds, trusts, foundations, businesses resident outside the UAE, branches of foreign entities with income taxed outside the UAE, purely domestic UAE businesses not part of a multinational group and owned by UAE residents. Sole establishments, being non-juridical persons, are exempt from the ESR law.
The eligible licencees that are involved in the relevant activities but not earning any income from the relevant activities are liable to submit the notification only. However, if they are earning relevant income; then such licencee s are liable to submit the notification, satisfy the ESR test and submit the ESR report.
The notification is required to be submitted within six months from the end of the relevant financial year. The notification requires some basic information about the about the business, its regulatory authority, and its ownership.
To satisfy the ESR test, the licencee is liable to comply with the functional test, management test and adequacy test.
The functional test requires that the licencee conducts core income-generating activities (CIGA) in the UAE. The licencees involved in the holding company’s business, are not liable to satisfy the CIGA test.
The management test for a licencee in the UAE necessitates that the licencee be directed and managed within the country. This involves holding at least one board meeting in the UAE each year, with a full quorum and physical presence of directors. If the licencee is managed by shareholders/owners/partners, these requirements apply to the manager/managers. Additionally, the law mandates that meeting minutes be taken, in writing, and signed by attending directors. These minutes should record strategic decisions made and be kept in the UAE. Furthermore, the ESR law stipulates that directors must possess the requisite knowledge and expertise to fulfil their duties.
The adequacy test for a licencee in the UAE demands that the licencee maintain sufficient employees, operating expenditures, and physical assets within the country. This entails having an adequate number of qualified full-time employees who are physically present in the UAE, whether employed directly or through a third party on temporary or long-term contracts. Additionally, the licencee or third party must possess adequate operating expenditures, assets, and employees in the UAE. The physical assets include offices or business premises, and such premises may be owned or leased by the licencee.
Licencees earning relevant income must submit the ESR report within 12 months from the end of the relevant financial year. The report includes basic information as provided in the notification and financial details such as revenue earned from relevant activities, number of employees, number of meetings etc.
The FTA, as the national assessing authority, evaluates whether licencees have met the ESR test, typically within six years after the relevant financial years. However, this time limit does not apply in cases of fraud, misrepresentation, or gross negligence. Noncompliance with the ESR can result in penalties ranging from Dh20,000 to Dh400,000. Persistent non-compliance may lead to the suspension, revocation, or non-renewal of the license by the national assessing authority.
The year end is approaching, and numerous businesses are liable to submit the notification or report before December 31, 2023. We advise eligible juridical persons to evaluate their status and submit the ESR notification or report as necessary.
Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official opinion of Khaleej Times but an opinion of the writer. For any clarification, please feel free to contact him at [email protected].