How Can High Risk IP Businesses Meet UAE Economic Substance Test ?
IP poses a greater risk of artificial profit shifting as opposed to income derived from non-IP related activities. In view of this higher risk, the Licensees that conduct the High-risk IP Business are considered to have failed the ESR Test.
The level of requirements for the companies to meet the Economic Substance Test differs and when it comes to the Relevant Activity of Intellectual Property Business, the Licensees have to face increased compliance requirements. A UAE business is regarded as carrying on an Intellectual Property Business if it holds, exploits, or receives gross income from Intellectual Property Assets such as copyrights, patents, trademarks, brands, and technical know-how. And From which the Licensee earns separately identifiable income such as royalties, license fees, franchise fees, capital gains, and any other income from the sale or exploitation of the IP Asset.
What is a High-Risk IP Licensee?
A company that carries out the Relevant Activity of Intellectual Property Business becomes a High-Risk IP Business under certain conditions, which are:
- The licensee didn’t create the Intellectual Property
- The licensee acquired the Intellectual property either from a related a person or in consideration for funding research and development by person residing in a country outside the UAE
- The licensee licensed the IP asset to one or more related person or earns an income from the asset as a result of the activities performed by the foreign-related persons
- The licensee is not conducting research and development, or branding, marketing, and distribution as part of its Core Income-Generating Activity
What does it mean if a Licensee has a “High Risk” IP Business?
If a company is determined as a High-Risk IP Business then the information about the company will be shared with the foreign competent authority of the parent company, ultimate company, and ultimate beneficial owner. The regulatory authority will determine that the IP business didn’t meet the Economic Substance Test unless the increased level of requirements is met.
How companies can rebut to Ensure Economic Substance Compliance?
The High-Risk IP Company should demonstrate and submit proof that it had a higher level of control over developing the IP asset. The company must have adequate full-time employees with relevant qualifications and the employees should be residing and conducting the activities in the UAE.
To prove this requirement, the High-Risk IP entities should submit employee information to the regulatory authority such as experience, contracts, qualifications, etc. The company should provide the business plan that states its reasons for holding the IP in the UAE and relevant decision making takes place in the UAE. Periodic decisions made by non-resident directors or board of members would not be sufficient.
How Jitendra Chartered Accountants Help the Companies?
The companies that fall within the scope of ESR in the UAE are mandatorily required to undergo the Economic Substance Test. As part of the test, the entities need to demonstrate they are conducting core income-generating activities, conducted adequate board meetings in the UAE, and have adequate full-time employees and physical assets to carry out the relevant activities. However, the level of requirements for demonstrating economic substance is not the same for all the entities. The companies that conduct the Intellectual Property Business need to face a higher level of requirements if they are determined to be High-Risk IP Business.
The High-Risk IP Businesses face an increased risk of failing the Economic Substance Test and have to pay hefty penalties. It is in this situation that a professional ESR service provider like Jitendra Chartered Accountants (JCA) comes to aid of such entities. JCA has a team of highly qualified Chartered Accountants and business setup consultants who assist the High-Risk Businesses to make an action plan to meet the Economic Substance Test.