New ESR requirements for company owners in the UAE
Check it out, it can affect you too!
The new ESR rules, which entered into force on April 30, 2019 in accordance with Cabinet of Ministers Resolution No. 31 on establishing requirements for economic presence (ESR), will be applicable in practice as early as 2020.
The global fight against tax evasion began in the last decade. The Organization for Economic Cooperation and Development (OECD) has created an Action Plan to counteract the Erosion of the Tax Base (BEPS). A worldwide trend has become the constant struggle of the state authorities with offshore companies and the activities of tax havens, as a result – the prohibition of the use of tax benefits by shell companies. One of the main requirements in compliance with the principles of transparent taxation has become the need for a real economic presence (substance) of foreign companies in a particular jurisdiction.
In order to avoid negative impact from the international community and "whitewash" its jurisdiction, the United Arab Emirates has adopted new rules that require ALL licensed companies in the UAE to comply with obligations to notify and file declarations, as well as to fulfill obligations by companies to maintain a proper "economic presence" in the UAE.
What are the new ESR rules?
ESR is a way to combat low–tax jurisdictions whose tax systems contribute to the creation of artificial structures without companies registered in these structures carrying out real economic activity. In other words, these are companies that receive profits that are not supported by sufficient activity and the actual presence of the company in the relevant jurisdiction.
The absence of a real economic presence of the company in the country of its registration today is a key factor indicating possible tax evasion.
In order to confirm that a company in the UAE conducts real activities, all licensed organizations in the UAE must submit an annual notification in a certain form — "ESR Application".
A test for the presence of an economic presence. Test yourself and your business on six main points:
1) Confirmation of the actual (real) financial, economic and operational activities of the company in this jurisdiction
2) The company carries out its main income-generating activities in the UAE ("main profit-making activities" (CIGA)) in the UAE
3) The Company carries out Operating costs in the UAE
4) The company has full-time employees with appropriate qualifications
5) The presence of a physical office of the company in the UAE
6) The company engages third parties to maintain the proper level of economic presence, but it must demonstrate the proper level of external control over the company's outsourced functions.
Who falls under the actions of the ESR? Where to run and who to notify?
In the context of international requirements for economic presence, all foreign companies (both offshore and onshore) registered in jurisdictions with "zero or low taxation" are required to confirm their activities in the country of registration, based on the 6 main points mentioned above. Companies have the burden of proving that they are registered in a low- or zero-tax country for reasons other than tax evasion.
Under the requirements of the ESR, in the current version, companies engaged in the following 9 types of activities fall:
• Banking business / Banking business
• Insurance business / Insurance business
• Fund management business/ Fund management business
• Financial leasing / Lease-finance business
• Headquarters business / Headquarters business
• Shipping business / Shipping business
• Holding business companies / Holding company business
• Business in sd intellectual Property / Intellectual Property (IP«) business
• Distribution and service center business /Distribution and service center business
The new rules require all licensed companies in the UAE to comply with the obligations to notify and submit declarations on the implementation of economic presence in the UAE by June 30, 2020. When submitting a notification, the company confirms that the information is correct.
Failure to comply, as well as providing false information, as well as carrying out the activities of a legal entity in violation of the ESR requirements entails the imposition of penalties, up to imprisonment, provided for in the ESR Regulations of Cabinet of Ministers Resolution No. 31 of 2019.
All companies from the UAE will have to check their compliance with the requirements for economic presence, as well as, if necessary, increase the level of presence in the UAE.
Antwort Law specialists will conduct an examination of your business and help raise the level of economic presence in the country of registration. The Antwort team will prepare notifications and reports for you to submit declarations to the UAE regulatory authority. Confirm your substance with us and pay the 0% tax rate in the UAE.
Value your time- contact Antwort!