A Guide to Exempted Licensees under ESR in the UAE
The UAE’s amended Economic Substance Regulation (ESR) has categorised businesses into licensee and exempted licensee, which determines an entity’s ESR obligations. The categorisation is based on the nine relevant activities such as banking, insurance, shipping, lease-finance, investment fund management, intellectual property, headquarters business, holding company business, and distribution and services. However, entities need to understand whether they qualify as an exempted licensee to decide the further course of action in terms of ESR.
For a licensee, ESR notification filing and ESR report filing are mandatory to save themselves from incurring ESR administrative penalties. By claiming the exempted licensee, the business can avoid the requirement of fulfilling the economic substance requirements and is not required to file an ES Report. This raises the pertinent question of whether the exempted licensees are free to avoid requirements like filing an ESR report in the UAE with the support of proper documentary pieces of evidence. Consulting with top ESR consultants in the UAE is a better strategy to clear the air on ESR obligations. However, this article serves as a guide for UAE businesses to decide whether they are an exempted licensee or not. Read on.
Who is An Exempted Licensee as per the ESR?
The ministerial decision no. 100 for 2020 on the issuance of directives for the implementation of the provisions of the cabinet decision no 57 of 2020 provides insight into the type of entities that are exempted, licensees. As per the ministerial decision, an exempted licensee means any of the following:
- An investment fund
- A licensee which is a tax resident in a jurisdiction other than the UAE
- An entity wholly owned by one or more residents in the UAE provided its not part of an MNC Group and only carries out business in the UAE
- Branch of a foreign entity whose relevant income is subject to tax outside the UAE
- Any other Licensee as determined pursuant to a decision of the Ministry of Finance
ESR Obligations of Exempted Licensees
Entities that are defined as exempted licensees need to file ESR notifications only, along with the documents to substantiate their exempt status to be excluded from the ESR. However, if a business fails to provide sufficient evidence to substantiate its status as an exempted licensee, the authorities will regard the entity as a licensee and will have to meet the Economic Substance test and file the ESR report.
How should Each Licensee Substantiate their Status?
Each type of exempted licensees is required to provide a pre-defined set of documents as evidence of exempted status. Consider the following breakup for understanding the documents required for proving the exempted status of the entities.
Licensee Wholly Owned By UAE Resident
The exempt licensee wholly owned by a UAE national or UAE resident but is not part of a multinational group and having operations only in the UAE must submit shareholder register, structure chart, proof of nationality and/or residency of shareholder(s), and copy of financial statements.
An investment fund can substantiate exempt status by filing a copy of statutory documents, a copy of the PPM/information memorandum, copy of the investment fund’s license and registration (for a fund established in a jurisdiction outside the UAE). Further, a special purpose vehicle (SPV) or holding company of an investment fund is required to provide a structure chart of the fund and its subsidiary investment entities. Or evidence of the investment fund status of the fund that has incorporated the UAE entities.
Licensee which is Tax Resident Outside the UAE
An exempted licensee, which is resident outside the UAE should submit details of the country in which it claims to be a tax resident, tax identification number issued by the country, and a letter or certificate of an assessment to corporate income tax and evidence of its payment.
A UAE branch of a foreign company with all of its income subject to tax in the jurisdiction of the foreign company is an exempted licensee. Here, a common mistake done by businesses is that they fail to check whether the foreign head office is paying taxes on the branch or not. Merely having a branch in the UAE does not qualify for exempt status, it has to pay taxes on the branch revenue in the tax jurisdictions of head office. In this case, the entity should furnish details of the country in which the parent company is resident for tax purposes, a tax identification number issued by a relevant foreign tax authority, and a copy of the tax returns.
Failure to meet the Exempted status
Any licensee who fails to meet the exempted status or fails to provide the required supporting documents are required to meet the Economic Substance Test concerning relevant activity carried out by them and are required to file the ES Report. The businesses should be warned about the following ESR penalties:
- Non-filing of notification will attract a penalty of AED 20,000
- Non-filing of ES Report will attract a penalty of AED 50,000 (if no proper supporting documents are provided to claim the exempt status) and if the same violation continues in the subsequent year also will attract a penalty of AED 400,000
- Providing inaccurate information will attract a penalty of AED 50,000
Why Seek The Help of ESR consultants in the UAE?
The amended UAE ESR law states that the entities that don’t conduct relevant activities need not submit ESR Notification. Even then it is possible that the business that doesn’t qualify for ESR in one year may become so in the subsequent year. In such a case, the businesses should assess their ESR status every year. Also, Exempted Licensees require assistance in terms of providing proper documents and filing ESR notifications. These situations warrant the assistance of the best ESR consultants in the UAE such as Jitendra Chartered Accountants (JCA). JCA provides effective advisory in filing ESR notification and reports with sufficient documents. JCA also advises the Licensees on how to meet the ESR test in compliance with the existing laws.