It is mandatory for businesses that fall within the scope of Economic Substance Regulations in the United Arab Emirates to undergo the Economic Substance Test. In order to meet the requirements of the Economic Substance Test the Licensees need to show they have conducted Core Income Generating Activities, carried out sufficient board meetings, and have the number of full-time qualified employees and assets to carry out the respective Relevant Activity. However, when it comes to demonstrating the High-Risk IP Business, the Licensees need to face a higher and stricter level of requirements to undergo their determination. The High-Risk IP Business has an increased risk of failing the Economic Substance Test and due to this they have to pay hefty penalties
Under Economic Substance Regulations a Licensee or Exempted Licensee who carries on an Intellectual Property Business should also consider if it is a High-Risk IP Licensee in order to meet the Economic Substance Test. ESR under Article 1 of Ministerial Decision 57 of 2020 explains how High-Risk IP Licensee meets Economic Substance Test in UAE.
According to Economic Substance Regulations, companies in the United Arab Emirates undergoes Intellectual Property Business when the business carries, utilizes, or receives its gross income from Intellectual Property Assets which is the right an intellectual property holds in its abstract assets. Under ESR, the abstract assets include the copyrights, patents, trademarks, brands, and technical know-how, from which the Business earns a recognizable amount of income in the form of royalty payment, permit fees of the Licensee, franchise fees of the company, capital gains of the respective business and any other revenue subjected from the selling or utilization of the Intellectual Property Asset. Mostly the Businesses in UAE do not earn a recognizable amount of income from Intellectual Property Assets rather they own these assets due to which the ownership of the assets will not be considered Intellectual Property Business. This is because the Intellectual Property Asset provides assistance to the main business of the UAE business and is not the main business itself.
In accordance with ESR in UAE a Licensee who carries on an Intellectual Property Business, and follows the underlying Economic Substance Requirements meets the Economic Substance Test:
- The Intellectual Property Asset held by a Licensee was not made for the purpose of its business in UAE.
- The Intellectual Property Asset held by the Licensee was acquired from a connected person or by another person who is a resident in a foreign jurisdiction for the purpose of funding research and development.
- The Intellectual Property Asset has either been sold or licensed to the connected persons by the Licensee. Else, when the Licensee earns a recognizable amount of income from another person who is a resident in a foreign jurisdiction with regards to the utilization of the Intellectual Property Asset.
By default, any High-Risk IP Business is said to have failed the Economic Substance Test, unless and until the Licensee is capable to bring forward adequate evidence in order to disprove this determination. For that, the High-Risk IP Licensees are required to submit supporting documents in order to provide adequate evidence. In addition to this, the High-Risk IP Licensees should prove that it has and previously had control over the DEMPE functions which include the following five functions of the Intellectual Property Asset;
The High-Risk IP Business is further required to possess a sufficient number of full-time qualified employees who are permanent residents and carry out their Core Income Generating Activities in the UAE in order to meet the Economic Substance Test. Moreover, they need to provide the following necessary information:
- A well-defined plan developed by the Licensee for its business in which it shows why it owns the Intellectual Property Asset in the UAE.
- The information regarding the duration, experience level, contracts as well as skills and qualifications of the full-time qualified employees.
- The provision of the information that decision-making is taking place in the United Arab Emirates.
High-Risk IP Businesses should submit all the reporting requirements to the Regulatory Authorities provided under ESR in UAE which will submit it to the National Assessing Authority which will ultimately submit the received information to the Competent Authority even if the National Assessing Authority had not determined that the Licensee has met the Economic Substance Test or not.
Next, the Competent Authority, keeping under consideration the international treaties and agreements to which the UAE is a party, will submit the received information from National Assessing Authority to the Foreign Competent Authority. The country of the Foreign Competent Authority is the one in which the Parent Company, the Ultimate Parent Company and the Ultimate Beneficial Owner of High-Risk IP Licensees reside.
For more tailored advice regarding ESR , call us here in Economic Substance Regulations!
Bola Olaoye is a Legal Senior Associate and holds an LLB from Adekunle Ajasin University as well as a Bar Certificate from the Council of Legal Education. With experience spanning 14 years, she knows the ins and outs of UAE’s laws and practices and has helped provide clear and concise guidance to clients on the appropriate law-abiding measures to be taken concerning Economic Substance Regulations (ESR).