Economic Substance Regulation in UAE guidlines slides to assist and guide for ESR compliance

1. “
”
ECONOMIC SUBSTANCE REGULATIONS (ESR)
Member firm of Leading Edge Alliance

2. Q& A
Agenda

4. Brief Overview
of
ECONOMIC SUBSTANCE
REGULATIONS (ESR)

5. ECONOMIC SUBSTANCE REPORTING IN UAE
UAE and other countries in the Middle East are members of the OECD’s Base Erosion and Profit
Shifting (“BEPS”) which bounds the members to implement certain minimum tax & other
reforms, including Country by Country Reporting (CbCR) and Economic Substance Reporting
(ESR) for entities which are part of a large multinationals or involved in certain relevant activities
as defined by relevant UAE cabinet resolutions.
What is Economic Substance Reporting
UAE Cabinet issued the Cabinet of Ministers Resolution No.31 of 2019 concerning economic
substance regulations in the UAE on 30 April 2019 requiring all UAE entities that carry on
certain activities called “Relevant Activities” to demonstrate economic substance in the UAE
from 30 April 2019. The regulations applies to UAE based entities that carry relevant activities to
report and file certain reporting & notification with relevant authorities, this excludes entities
where government is a stakeholder. The ESR regulation have been issued in response to comply
the concerns raised by European Commission and inclusion of UAE in non-cooperative tax
jurisdiction, the initiative will further align the UAE regulatory environment to the standard set
out in the OECD Base Erosion and Profit Shifting (BEPS) action plans.

6. NOV-18
The Inclusive Framework on
BEPS decided to resume the
application of the substantial
activities' requirement for no
or only nominal tax
jurisdictions.
DEC-18
Bahamas, Bahrain, BVI,
Bermuda, Cayman Islands,
Guernsey, Isle of Man and
Jersey issued economic
substance regulations.
FEB-19
Cayman Islands issued
economic substance
guidance v1.0.
APR-19
UAE issued economic
substance guidance and
Cayman Islands issued v2.0.
SEP-19
UAE issued additional
guidance on economic
substance regulations.
JAN-20
First notification
be submitted in
UAE.
DEC-20
First report to be
submitted for
entities with FY
commencing 01
Jan 2019.
ESR Background:
DEC-17
EU releases list of non-
cooperative jurisdictions
for tax purposes with
one of the objectives
being to screen
jurisdictions facilitating
company set-ups
without economic
substance.
UAE was included in the
list for not applying
BEPS minimum
standards

7. Bahamas, Bahrain, BVI, Bermuda,
Cayman Islands, Guernsey, Isle of
Man and Jersey issued economic
substance regulations.
ESR COUNTRIES

8. ECONOMIC SUBSTANCE REGULATIONS | COUNTRIES
Bermud
a
Bahama
s
BVI
Cayman
Islands
Isle of
Man
Jerse
y
Guernse
y
Seychell
es
Mauritius
Bahrai
n UAE
8
6

9. ESR APPLICATION
• A license holders that carries out a
“Relevant Activity”, established in the
Mainland UAE or the various free zones as
a representative office, branch or a
commercial enterprise.
ESR Exceptions
• Exceptions apply to a commercial enterprise
in which the government (emirate or
federal) has at least 51% direct or indirect
ownership stake. Such an entity carrying
out a relevant activity would only need to
make a notification.
• The activities considered as a “Relevant
Activity” are as follows:
UAE -
ECONOMIC
SUBSTANCE
REGULATIO
NS
Entities
On 30 April 2019, the UAE issued the
Cabinet of Ministers Resolution No.
31 of 2019 concerning economic
substance regulations
The aim was to address the
findings issued by the Council of
the European Union, and
possible exclusion from the EU
list of non-cooperative
jurisdictions for tax purposes.
The regulations were published on
20 June 2019 in public domain.
Additional guidance was published
on 12 September 2019. Regulatory
Authorities were notified vide
Cabinet Resolution No 58 of 2019
dated 4 September 2019 (which
included FTZs) and FAQs were
released on 5 January 2020.
1. BANKING
2. INSURANCE
3. FUND MANAGEMENT
4. LEASE FINANCE
5. HEADQUARTERS
6. SHIPPING
7. HOLDING COMPANY
8. INTELLECTUAL PROPERTY
9. DISTRIBUTION
AND SERVICE
CENTERS

10. A Brief- ESR
 Introduced w.e.f. 30th April 2019
 Following categories of Companies that carries on Relevant
Activities
Who are subject
to the
Regulation
All UAE
Onshore
Free
Zone
UAE
Offshore
Who are
Exempt
?
Entities directly or
indirectly owned 51%
or more by the UAE
Government (both
Federal and Local)

11. “Relevant Activities” as per Article 4
11
Investment Fund
Management Business
Banking Business Lease-Finance Business
Insurance Business Headquarters Business
Shipping Business
Holding Company
Business
Intellectual Property
Business
Distribution and Service
Centre Business
Note: It is not required that a UAE business is actively engaged in any of the above business categories for
it to be considered as carrying on a Relevant Activity. Even a passive receipt of Income under one of the Relevant
Activity, then is said to carry on the RelevantActivity……NO THRESHOLD

12. Economic Substance Regulations - briefly
12
License
e
Relevant
Activity
CIGA Non-CIGA
* Licensees are required to demonstrate ES in respect of each RelevantActivity (RA), unless the other RAs are
ancillary to a main RA
Non-
Relevant
Activity
Substance Over
form
Multiple Reporting
Duplicate
Reporting*

13. Summary of RelevantActivities,CIGA & Non-CIGA
13
Relevant Activity CIGAs (Indicative & not exhaustive) Non-
CIGAs
Banking Business • Raising funds, managing risk including credit, currency and interest risk.
• Taking hedging positions.
• Providing loans, credit or other financial services to customers.
• Managing capital and preparing reports to investors or any
government authority with functions relating to the supervision or
regulation of such business.
Supportandotherbackofficefunctions
Insurance
Business
• Predicting and calculating risk.
• Insuring or re-insuring against risk and providing Insurance Business
services to
clients.
• Underwriting insurance and reinsurance.
Investment
Fund
Management
Business
• Taking decisions on the holding and selling of investments.
• Calculating risk 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.

14. Summary of RelevantActivities,CIGA & Non-CIGA
14
Relevant Activity CIGAs (Indicative & not exhaustive) Non-
CIGAs
Intellectual
Property
Business
Where IP is a:
• Patent or an asset that is similar to a patent - Research and development
• Non-trade intangible (including a trademark) - Branding, Marketing and
Distribution
High Risk IPs -AdditionalActivities
• Taking strategic decisions and managing the principal risks related to:
 Development and subsequent exploitation of the IPAsset
 Acquisition by third parties and subsequent exploitation and protection of the IPAsset
• Carrying on the ancillary trading activities through which the IP assets are
exploited leading to the generation of income from third parties
Supportandotherbackofficefunctions
Lease Finance
Business
• Agreeing funding terms.
• Identifying and acquiring assets to be leased (in the case of leasing).
• Setting the terms and duration of any financing or leasing.
• Monitoring and revising any agreements.
• Managing any risks.
Headquarter
Business
• Taking relevant management decisions.
• Incurring operating expenditures on behalf of group entities.
• Coordinating group activities.

15. Summary of RelevantActivities,CIGA & Non-CIGA
15
Relevant Activity CIGAs (Indicative & not exhaustive) Non-
CIGAs
Shipping Business • Managing crew (including hiring, paying and overseeing crew members).
• Overhauling and maintaining ships.
• Overseeing and tracking shipping.
• Determining what goods to order and when to deliver them, organizing
and overseeing voyages.
Supportandotherbackofficefunctions
Holding
Company
Business
• All activities related to that business; and in respect of Holding
Company Business that derives income from other sources other
than dividends and capital gains from its equity interest,
• The CIGA shall be those activities associated with the income generated.
Distribution
and Service
Business
• Transporting and Storing component parts, materials or goods ready for
sale
• Managing inventories
• Taking orders
• Providing consulting or other administrative services

16. Requirement to meet ES Test
As per ESR Regulations, Clause 2 ofArticle 6
A licensee meets the EST in relation to relevant activity in the following cases;
(1) if the Licensee conducts Core Income-Generating Activity (CIGA) within the UAE &
(2) if the Licensee and its relevant activity are being directed and managed in the UAE.
(3) having regard to the level of RelevantActivity, the licenses has an
- adequate number of qualified full-time employees or adequate level of expenditure on outsourcing to 3rd
Party service providers*
- adequate operating expenditure incurred by it in the UAE.
- adequate physical assets in the UAE;
* Such 3rd Party service provider’s activities, employees, expenditure and premises are in the UAE and are adequate.

17. Requirement to meet ES Test
17
(Cont’d.)
The test for ‘directed and managed in the UAE’ is satisfied if the below conditions are met:
a) the Licensee’s BOD meets in the UAE at an adequate frequency as needed for decision-making. Adequacy
depends on
Note:
In the case of branch/ representative offices of foreign companies (where no BOD exists but managed by Manager or CEO or
GM). Such Manager/CEO/GM shall be physically present in the UAE when taking key decision relating to the management and
operation of these entities and all above requirements shall apply.
the level of relevant activity …. However at least one meeting shall be held in
UAE in
requirements as per MOA/AOA shall also be met.
a FY. Additionally,
meeting
b) there is a quorum of directors physically present in the UAE. …Quorum as per
MOA/AOA
c) minutes of BOD meeting is recorded and signed by the directors attending the
meetings.
d) minutes of BOD meetings shall record the strategic decisions at the meeting.
e) the BOD have the necessary knowledge and expertise to discharge the duties of the
board.
f) the minutes of all BOD meetings and the records of the Licensee are kept in the
UAE.

18. Requirement to meet ES Test
18
(Con’td.)
h) A Licensee may elect to outsource a RelevantActivity to 3rd party service providers, provided that:
i.the Licensee is able to demonstrate adequate supervision of the outsourced activity.
ii.the outsourced activity must be conducted in the UAE.
iii.the economic substance of service providers will not be counted multiple times by multiple
Licensees when evidencing their own substance in the UAE.
Note:
Outsourcing must not be used to circumvent ESTest.

19. Notification
19
Who needs to notify and by when?
 A Licensees that undertakes a Relevant Activity (irrespective of an exemption or has/ has not
earned income from the Relevant Activity during the relevant financial period) need to submit a
simple notification with its RegulatoryAuthority.
 The due date for filing the ESR Notification is 30th June 2020 (as specified by most of the
Regulatory Authorities)
What information is to be submitted to RegulatoryAuthority?
i. Whether or not it carries out a RelevantActivity
ii. Whether or not all or any part of the Licensees’ Gross Income in relation to a Relevant Activity is
subject toTAX in a Jurisdiction outside UAE
The date of the end of its FinancialYear.
iii
.

20. •Actual presence test:
Directed and managed in the UAE (which includes
requirement for board meetings in UAE, and for a
quorum of directors to be physically present in the UAE
during these meetings)
•Activity test:
Undertake state core income generating activity in the
UAE (Article 5 sets out the activity criteria for each of
the RelevantActivities)
•Adequacy test (in relationto relevant activity)
1. have ‘adequate’ number of qualified full-time
employees in the UAE
2. have ‘adequate’ operating expenditure
3. have ‘adequate’ physical assets in the UAE

21. meetings
a) The Licensee’s board of directors meets in the State at an adequate frequency having
regard to the amount of decision- making required at that level.
b) At such board meetings, there is a quorum of directors physically present in the State.
c) The meetings are recorded in written minutes and signed by the directors attending the
meetings.
d) The minutes of such board meetings record the making of strategic decisions of the
Licensee at the meeting.
e) The directors of the Licensee have the necessary knowledge and expertise to discharge
the duties of the board.
f) The minutes of all board meetings and the records of the Licensee are kept in the State.
MANAGEMENT TEST

22.  Entities are required to stratify certain requirements to fall under the Economic Substance Reporting
and Compliance in UAE:
 Engage and conduct relevant “Core Income Generating Activities” called CIGA, in UAE.
 Directed and Managed within the UAE.
 Have employees, premises or assets in the UAE.
 Inquire adequate expenses in the UAE.
 If outsourced certain activities, the outsourcing activities must be performed and based in UAE.
 If entities are carrying more than one relevant activity, each activity must meet the economic
substance requirements
Economic Substance Test Requirements

23. TIMELINE DATES:
Snapshot depicting the entities which carries on a Relevant Activity, with a financial year
from 01 January 2019 to 31 December 2019, will have to adhere to the following
timelines:
Jan Apr
30 April 2019
ES effective date
Dec
01 January 2020
Notification to the
authorities for
FY19
Jan Dec
31 December 2020
Submission of report for FY19*
Note: An entity carries out a relevant activity and derives income therefrom; Where no income
is derived only notification is to be made
01 January 2019
Commencement of FY19

24. COMPLIANCES REQUIRED FOR LICENSEES
Entities carrying out
RelevantActivities but
not deriving income in
theUAE
Entities licensed to
carry out Relevant
Activities but do not
conduct such activities
Entities that are not
licensed to and do not
carry out a Relevant
Activity
All entities (branches,
subsidiaries and other
forms) in a group
structure
No notification
and reporting
requirement
No notification
and reporting
requirement
Notification
requirement w.e.f.
01 January 2020
Notificationw.e.f.
01 January 2020
and
reportingrequirement
w.e.f. 31 December 2020
Exempt entities (i.e. with at least 51% government shareholdings) and
undertaking a relevant activity need to only submit a NOTIFICATION.
10

25. NOTIFICATION REQUIREMENT (ANNUALLY)
An Entity having a Licensee carrying out a Relevant Activity shall
submit an annual notification containing the following:
a) whether or not it carries out a Relevant Activity;
b) whether or not all or part of the Licensee’s gross income in
relation to a Relevant Activity is subject to tax in a jurisdiction
outside of the UAE; and
c) the date of the end of its Financial Year.
The time, form and manner of the notification
will be specified by the Regulatory Authority.

26. UAE ECONOMIC SUBSTANCE
REGULATIONSIMPORTANT
CLARIFICATIONS
Licensees that are part of a group will NOT be assessed on a consolidated
basis; That being said, relevant economic substance tests will need to be
demonstrated by each entity.
Having a UAE Tax Residency Certificate for a financial period will NOT serve as
proof of
meeting the economic substance test for that relevant period.

27. COMPLIANCE REQUIREMENTS
• The typeof RelevantActivityconducted by it.
• The amount and type of relevant income in respect of the Relevant Activity
• The amount and type of operating expenses and assets in respect of the RelevantActivity.
• The location of the place of business in the state.
• The number of full-time employees with qualifications.
• Information showing the StateCore Income-GeneratingActivityin respect of the
RelevantActivity that has been conducted.
• A declaration as to whether or not the Licensee satisfiesthe economic substance test.
Additional information is required to be submitted in the case of high-risk IP entities and activities
outsourced to third party service companies.

28. OFFENCES OF NON-COMPLIANCE
Article 9 (3), if a licensee notifies the regulatory authority that it does not meet the economic
substance test, then the competent authority shall exchange information of the licensee to the
foreign competent authority as below:
Foreign competent authority in the jurisdiction where the parent company resides
Foreign competent authority in the jurisdiction where the ultimate parent company resides
Foreign competent authority in the jurisdiction where the ultimate beneficial owner resides

29. OFFENCES AND PENALTIES
year 1
year 2
year 2
Failure to meet the economic substance test: Up to AED 50,000.
If repeated the next year: Up to AED 300,000.
Suspension, revocation or non-renewal of the license of a licensee in case of repeated
non-compliance.
Failure to notify/ provide any information or providing inaccurate information:
BetweenAED 10,000 and 50,000

31. SUMMARY OF DUE DATES AND GUIDANCE
Relevant Authority Due Dates with updated comments Further Guidelines
Dubai Development Authority
(DDA)
Not published yet.
DDA updated in email “note that there is no official
announcement regarding the Economic Substance
Regulations from our management yet. Once it is ready, a
circular will be sent to all our business partners with full
details regarding this matter”.
Dubai Silicon Oasis (DSO)
20th
March 2020, it is no longer applicable, new date to be
announced.
DSO already shared a summary of ESR guidelines with its
licensees.
DMCC June 30th
, 2020.
Refer (to) the details (ed) guidance published by
Refer further note in annexure below.
Dubai International Financial
Centre (DIFC)
The last communicated due date was March 3, 2020,
no longer applicable, net date to be announced.
DIFC details guidelines are available here for further
reference.
Abu Dhabi Global Markets
(ADGM)
The previous date was March 31st
, 2020, which is not
applicable now, new date to be announced.
ADGM Licensees has to file the notification via their website,
for further guidance refer www.registration.adgm.com.
DAFZA May 3rd
, 2020. Refer to the Annex at the end of this Alert.
Ajman Free Zone June 30th
, 2020.
Ajman Free Zone already shared details guidance to its
licensees.
UAQ Free Trade Zone Refer the guidelines provided on their website
https://uaqftz.com/blog/2020/02/13/economic-substance-
rules-how-do-they-affect-uae-business-owners/
RAK Economic Zone June 30th, 2020. Further details are not published yet.
RAK ICC June 30th
, 2020
RAK ICC shared the template and other filing step by step
details, refer annex below.

32. Where to report Economic Substance Reporting
The relevant incorporating authority is nominated as regulatory authority for ESR
compliance reporting and notification filling, here is the list issued by government of
UAE:
Banking Business UAECentral Bank & Financial Free Zone for banking business carried out therein
Insurance Business InsuranceAuthority & CompetentAuthority in Free Zone/Financial Free Zone for business
carried out therein
Investment Fund Management
Business
Security andCommodity Authority & CompetentAuthority in Free Zone/Financial Free Zone
for business carried out therein
Lease Finance Business UAECentral Bank & Financial Free Zone for banking business carried out therein
Headquarter Business Ministry of Economy & CompetentAuthority in Free Zone/Financial Free Zone for business
carried out therein
Shipping Business Ministry of Economy & CompetentAuthority in Free Zone/Financial Free Zone for business
carried out therein
Holding Company Business Ministry of Economy & CompetentAuthority in Free Zone/Financial Free Zone for business
carried out therein
Intellectual Property Business Ministry of Economy & CompetentAuthority in Free Zone/Financial Free Zone for business
carried out therein
Distribution and Service Center
Business
Ministry of Economy & CompetentAuthority in Free Zone/Financial Free Zone for business
carried out therein