According to Ministerial Decision 100 of 2020, an Exempted Licensee under Economic Substance Regulations includes any of the following entities registered in the United Arab Emirates and which carry out a Relevant Activity:
- An investment fund.
- An applicant who is a tax tenant in a state other than the United Arab Emirates
- An organization completely owned by the citizens of the UAE keeping in view that the Exempted Licensee is not part of any Multinational Corporation and has organization only in the UAE.
- Branch of a foreign organization whose revenue is subject to tax outside the United Arab Emirates.
According to Economic Substance Regulations, an Investment Fund is an organization that deals with issuing investment interests in order to raise funds. The purpose of this is to enable that organization to benefit from the profits and includes any organization through which an investment fund directly or indirectly invests. However, it does not include an organization or organizations in which the fund invests.
To make the statement clear, the words “through which an investment fund directly or indirectly invests ” refers to UAE citizens whose only purpose is to assist the investment made by the Investment Fund. Investment Funds is different from the Investment Fund Management Business which is clearly regulated under the Economic Substance Regulation. Moreover, the Investment Fund itself is not considered an Investment Fund Management Business, unless it is a self-managed fund.
You may also like: ESR for Lease Finance Business in UAE
Tax Resident in a Jurisdiction other than the United Arab Emirates
Exempted Licensee under Economic Substance Regulations can not meet the Economic Substance Test if it is a tax tenant in a jurisdiction outside the United Arab Emirates. In such case, the Exempted Licensee must be subject to company tax on all of its income from a Relevant Activity keeping in view that the tax resident is in a jurisdiction other than the UAE.
You should know : Relevant Activities under Economic Substance Regulations
An Entity Wholly Owned by UAE Residents
An organization completely owned by the citizens of the UAE keeping in view that Exempted Licensee under Economic Substance Regulations is not part of any Multinational Corporation and has organization only in the UAE. The organization should therefore have no business outside the UAE. Keeping in view this fact, UAE citizens and individuals holding a valid UAE residence permit, who reside in the UAE are considered UAE Residents.
A UAE Branch of a Foreign Organization the Relevant Income of Which is Subject to Tax in a Jurisdiction Other than the United Arab Emirates
An organization can not meet the requirements of the Economic Substance Test if such organization is a branch of a foreign organization and its revenue is subject to company tax in the jurisdiction where such foreign organization is a tax tenant.
Read more about : The new Economic Substance Regulations for UAE Companies
Obligations of Exempted Licensees under ESR
Exempted Licensees are subjected to the Economic Substance Regulations from the financial year commencing on 1 January 2019, or from the date on which the Exempted Licensees begin carrying out a Relevant Activity. Organizations that are Exempted Licensees require ESR notification filing and the submission of documents to verify their exempt position claiming to be an Exempted Licensee for each financial year. The ESR notification must be filed electronically on the Ministry of Finance Portal within six months from the end of the Financial Year of the Exempted Licensees. The ESR Notification and relevant information submitted by Exempted Licensees will be reviewed by the respective Regulatory Authority for verification of information as well as to confirm whether the Exempted Licensee has sufficiently evidenced its status as an Exempted Licensee and to further notify the National Assessing Authority.
Organizations that are Exempted Licensees on the basis of being a tax resident in a foreign jurisdiction are required to submit one of the following documents along with its ESR notification:
- An organization of the foreign jurisdiction in which it is a tax tenant should issue a letter or certificate in which it states that the organization is considered to be resident for company tax purposes in that jurisdiction
- An assessment of company tax on the organization, a company tax demand, proof of payment of company tax, or any other associated document, issued by the organization of the foreign jurisdiction of which it claims to be a tax tenant.
But, if an organization did not submit adequate evidence to verify their position as an Exempted Licensee, the Regulatory Authorities will repute the organization as a Licensee and then it would be required to undergo the Economic Substance test and ESR filing UAE. Moreover, an Exempted Licensee will be subjected to the Economic Substance Regulation as long as such an organization continues to exist.
“The content of this article should not be relied on or reproduced, you are advised to consult with your ESR consultant for all economic substance regulations matters.”
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.