In order to implement the Economic Substance Regulations in the UAE, the Cabinet of Ministers appointed certain Regulatory Authorities, identified in Article 4 of Cabinet of Ministers Resolution No. 57 of 2020, that are given the power to implement, regulate and enforce the Economic Substance Regulations with reference to each Relevant Activity.
Pursuant to Article 6 of Ministerial Decision No. 100 for the Year 2020, the powers of Regulatory Authorities in the UAE as per Economic Substance Regulations are explained in detail.
Functions of Regulatory Authorities under the ESR Regulations
Article 4 of Cabinet of Ministers Resolution No. 57 of 2020 outlines the following functions of the Regulatory Authorities:
- Collecting Notifications Economic Substance Reports and supporting documents.
- Reviewing Notifications Economic Substance Reports and supporting documents for accuracy and completeness.
- Undertaking an assessment of Exempted Licensee’s information and documents for verifying its eligibility for the exemption status.
- Carrying out the ESR reporting requirements and exercising any other powers for the purposes of implementing the provisions of the Economic Substance Regulations.
- Carrying out any other powers in order to implement any decision of the Competent Authority, the Minister of Finance, or the National Assessing Authority.
Obtaining Records, Documentation and Other Relevant Information
The Regulatory Authorities are entrusted with the task of gathering all the necessary documentation, records and relevant information from the Licensees or Exempted Licensees that will enable the authority to monitor whether they are carrying out a Relevant Activity and whether they are complying with the Economic Substance Regulations. Moreover, in case the Licensees or Exempted Licensees fail to submit the required documentation, records and relevant information or provide incorrect or incomplete information to the Regulatory Authorities, the Authority concerned with the Relevant Activity under such purposes is required to take any of the following essential steps:
- The Regulatory Authority shall issue an official notice to the Licensee or an Exempted Licensee specifying the specific documents or information that are insufficient or require further clarification in the initial Notifications or Economic Substance Reports provided.
- The Regulatory Authority shall directly access specific records, documents or information by physically entering the premises of a Licensee or an Exempted Licensee for the purpose of obtaining essential documentation or information.
Determination of whether Economic Substance Test is Met
Under Article 7 of the Cabinet of Ministers Resolution No. 57 of 2020, each Regulatory Authority shall acquire a reasonable strategy in order to assess whether a Licensee has met the Economic Substance Test or not. For this purpose, the Regulatory Authority shall consider the following requirements in relation to the Relevant Activity that the Licensee carries out in the UAE:
- Core Income-Generating Activity carried out by the Licensee in the UAE.
- The Core Income-Generating Activities of the Licensees in relation to the Relevant Activity may change during the relevant Financial Year. Therefore, the Regulatory authority shall keep under consideration the adequate number of qualified employees, expenses incurred and other physical assets with respect to the fluctuations that occurred.
- The Regulatory Authority is required to gain insight into timesheets that provide detailed records of the hours worked by employees dedicated to carrying out Core Income Generating Activities in the UAE. Moreover, the Regulatory Authority also considers the qualifications of employees to ensure that they have the necessary expertise and skills to carry out the Relevant Activity. Additionally, the Regulatory Authority undertake industry-specific statistics which helps them in assessing whether the average revenue generated by the employees aligns with the relevant income in order to meet the Economic Substance Test.
- In case the board of directors perform Core Income Generating Activities in addition to their core functions, the Authority is required to obtain evidence of the CIGAs performed by the board of directors.
Sharing of Information and Reporting Requirements
Under Economic Substance Regulations it is the obligation of the Regulatory Authority to promptly share the following information and report the requirements to the Competent Authority:
- The Regulatory Authority related to the Relevant Activity shall share all the information provided by the Licensee or Exempted Licensee in the Notification and The Economic Substance Report to the Ministry of Finance, which is assigned as the Competent Authority under the Economic Substance Regulations.
- Ensuring compliance with the UAE Economic Substance Regulations requires the Regulatory Authority to submit all information obtained from a High-Risk IP Licensee to the Ministry of Finance, regardless of the fact that the Licensee has met the Economic Substance Test or not.
- If an Exempted Licensee is considered a tax resident in a jurisdiction outside of the UAE, the Regulatory Authority is required to share this information with the Ministry of Finance.
- In the case of an Exempted Licensee which is a branch of a foreign entity which operates within the UAE, but is legally accountable for taxes in a different jurisdiction, is required to relay this information to the Competent Authority.
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