All about Economic Substance Regulations(ESR) in UAE
What is the “Distribution and Service Centre” Business?
The Business “Distribution and Service Center” refers to two separate types of activity, which are covered by one heading “Relevant Activities”. Hence, a UAE entity is deemed to be involved in a distribution business if:
- Purchases goods from persons associated with foreigners; and
- Import these goods into the UAE; and
- Distributes these products outside the UAE. Organization in the UAE is considered to be employed in the Service Center.
Business if it:
- Provides services to a person associated with foreigners; and
- These services are related to the activities of a Foreign Affiliate outside the UAE.
The business entity requirements for the distribution and service centre business are applicable to UAE organizations whose main activity is the distribution and/or service centre. Therefore, licensees engaged in Banking, Insurance, Investment Fund Management, Lease-Finance, Shipping, or Headquarter Business may also purchase goods for, and/or provide services to foreign group companies as a normal part of their business operations.
As a result, to avoid duplication of reports, such Licensees are also not considered to be employed at the Distribution and Service Center. Also, units of the United Arab Emirates that buy and sell goods from third parties and to third parties or provide services to third parties are not subject to the Regulation (like the Distribution and Service Center).
What is a UAE Investment Fund Management Business?
What is Lease-Finance Business?
A UAE subject is considered involved in leasing and financial activities if it provides a loan or leases assets, equipment or any other goods to another person for consideration. Providing credit includes making loans and entering into other financing arrangements such as hire purchase agreements and finance leases.
Licensees engaged in Banking, Insurance, and Fund Management Business may also perform lease or financing activities as a normal part of their business operations. To prevent duplicate reporting, such Licensees are not part of Lease-Finance Business. Hence, they do not need to separately demonstrate economic substance with respect to any ancillary Lease-Finance activities.
Is lending to another group entity considered a “Lease-Finance Business”?
Yes, a UAE organization that provides a loan or provides any other form of loan to a UAE or a company of a foreign group for consideration (for example, interest) will be considered involved in leasing and financial activities.
What if there is no consideration payable for the credit provided?
The Regulations do not apply to credit and other financing and leasing arrangements where there is no expectation of consideration in the form of interest, fees, rental payments, capital gains or any other form of compensation. The grant of security in favour of the lender would not constitute consideration.
What is the Headquarter Business?
Does an entity need to be a ‘parent’ company to be a Headquarter Business?
No, a group’s corporate structure is not relevant in determining whether a UAE entity within the group is a Headquarter Business. Whether an entity is a Headquarter Business depends on the nature of the services it provides to foreign group companies.
Can an entity engage in a Headquarter Business in addition to carrying on another Relevant Activity?
What are the penalties for non-compliance of Ecomomic Substance Regulations UAE?
- Refusal of notification or providing inaccurate information may lead to a fine ranging between 10,000 to 50,000 dirhams.
- A fine of 10,000 to 50,000 dirhams; and
- Alleged inability to demonstrate economic substance regulations UAE. Inability to demonstrate
- sufficient economic substance in the UAE for the corresponding fiscal year: first failure
- A fine of 10,000 to 50,000 dirhams; and
- Exchange of information with foreign competent authorities: (1) the parent company, (2) the ultimate parent company, and (3) the ultimate beneficial owner. Second consecutive failure case
Information exchange with the foreign competent authority of (1) parent company, (2) ultimate parent company, and (3) ultimate beneficial owner; and - A penalty of AED 100k to 300k; and
- Furthermore, non-compliance may lead to the suspension and withdrawal of the company’s trade/ commercial licence.
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