The Economic Substance Regulations(ESR), introduced in UAE on the 30th of April 2019 with the Cabinet Resolution of 2019 no 31, applies requirements for economic substance on licensees or business entities in the country if they are conducting any of the specified relevant activities as per the legislation; and one of them is shipping business.
With effect on the 1st of January 2019 and the following financial years, all licensees or legal entities operating in the country are required in submitting financial information on a yearly basis in order to provide competent authorities the ability in monitoring whether a relevant business is in full compliance with the newly introduced economic substance requirements. An automatic notification can be expected to be made with UAE authorities with respect to relevant businesses that are found in breach of the legislation.
How We Can Help
At Economic Substance Regulations, our team of regulatory specialists based in the UAE helps companies that are engaged in the industry of shipping in reviewing their portfolios and identifying group structures with businesses that are in low-tax or zero jurisdictions. Our seasoned professionals assist businesses in checking the substance requirements that apply to the businesses in the territories in which they are conducting operations.
Our clients seek our professional advice on the measures that are to be put in place, where and if appropriate. We also provide assessment and counsel on the benefits and downsides of bringing a shipping business onshore.
ESR on a Shipping Business in UAE
A shipping business, as per the guidance released on the ESR application issued on the 11th of September 2019, means any of the activities listed below that involve ship operation anywhere in the globe other than solely in the waters of the UAE:
- Business of transporting persons, mail, goods, and/or animals by sea
- Chartering or renting of ships for purposes described earlier
- Management of a crew for a ship
- Rental, maintenance, and/or use of containers incl. vehicles and equipment such as trailers for container transport or use of transport of any item by sea
- Sale of tickets for travel or equivalent, including ancillary services that are in connection with a ship’s operations
The ship, as per the guidance provided by the Ministry of Finance, means every vessel that is used in navigation; however, it does not include a small ship of fewer than 24 m in length, a pleasure vessel, or a fishing vessel.
Economic substance test for the shipping business
Our team can perform the economic substance test to help assess if a legal entity carries out a relevant activity that subjects it to the economic substance legislation. The economic substance test ensures that a legal entity meets the following conditions:
- Have regard to scale and nature of shipping business in relation to ESR
- Directed and managed within the UAE as a shipping business
- With adequate expenditure annually which was incurred within the UAE
- With a sufficient number of qualified staff members that are tasked with activities that are related to shipping (number of qualified staff members must be physically present within UAE whether or not in a long term or temporary employment agreement with a relevant entity)
- Conducting a core income-generating activity within the UAE as described within the context of a shipping business
- With a physical office, where appropriate, for any core income-generating activity
Read More: How to File ESR Notification in the UAE
If any core income-generating activity of a relevant entity is carried out by another entity through outsourcing, the following conditions apply:
- No core income-generating activities are carried out beyond the jurisdiction of the UAE
- The relevant legal entity has the ability in controlling and monitoring the carrying out or implementation of activities that are performed by another entity
- Only part of business activity is attributable to an income generating activity for a relevant business entity or licensee and not for another legal entity when considering if a relevant legal entity is meeting the requirements for economic substance
UAE core income-generating activities for a shipping business
The relevant United Arab Emirates core income-generating activities within the context of a shipping business are the following:
- Overseeing and/or organizing voyages
- Determining the types of goods to order as well as when to have them delivered
- Tracking and/or overseeing deliveries
- Maintenance and hauling of ships
- Management or hiring, overseeing, and paying crew members
Economic Substance Regulations Service in UAE
All relevant legal entities are required by the law to submit an annual return on economic substance with information on how the rules of economic substance are being complied with. Failure in complying with the rules will lead to the imposition of hefty penalties and other ramifications that are determined by the ESR.
Do you want further information on how we can help you comply with relevant legislation? Call us now to book a consultation with regulatory experts in the UAE!
Syed Hassan Ali carries with him an experience of 13 years in providing legal guidance and consultancy. He is a holder of two degrees, one in Business Management and the other in Economics for Engineers and Scientists. He carries an in-depth knowledge of the UAE market and continues to be an asset to businesses, providing clarity regarding applicability of the ESR regulations as well as guide them in making informed decisions.