For ESR purposes in the UAE, specific entities are granted exemptions from the obligatory Economic Substance Test. The term “Exempted Licensee,” as defined under these regulations, encompasses the following types of entities registered in the UAE and engaged in Relevant Activities:
Investment Funds are entities primarily dedicated to issuing investment interests for fundraising or pooling investor capital, to allow investors to benefit from profits or gains stemming from the entity’s investment, management, or asset disposition. This definition encompasses both the Investment Fund itself and any entity directly or indirectly involved in its investments, except for the specific entities in which the fund ultimately invests.
Tax Residents in Foreign Jurisdictions
Entities that are tax residents in jurisdictions outside the UAE are exempt from the Economic Substance Test. To qualify for this exemption, such entities must be liable for corporate taxation on all income generated from a Relevant Activity due to their tax residency in a jurisdiction other than the UAE. It is important to clarify that paying withholding tax in a foreign jurisdiction alone does not establish tax residency in a foreign jurisdiction other than the UAE.
Entities Wholly Owned by UAE Residents
Entities that are wholly and beneficially owned directly or indirectly by UAE residents are exempt from the Economic Substance Test under the following conditions:
- They are not part of a Multinational Enterprise (MNE) Group.
- All of their activities are exclusively conducted within the UAE.
- The UAE resident owners of the entity reside in the UAE. The entity must abstain from conducting any business outside the UAE. In this context, “UAE residents” refer to UAE citizens and individuals with valid UAE residency permits residing in the UAE.
Read more: Economic Substance Requirements in UAE
UAE Branches of Foreign Entities with Taxable Relevant Income
Branches of foreign entities are exempt from the Economic Substance Test if their Relevant Income is subject to corporate taxation in the jurisdiction where the foreign entity holds tax residency.
Providing Evidence of Exempted Licensee Status
Entities asserting Exempted Licensee status must provide sufficient evidence to substantiate their claim for each Financial Year in which they seek this exemption. For instance, a Licensee claiming tax residency in a foreign jurisdiction must include one of the following documents with their Notification for each relevant Financial Year:
- A letter or certificate issued by the competent authority of the foreign jurisdiction, confirming the entity’s corporate income tax residency status.
- Documentation such as a corporate income tax assessment, demand, proof of payment, or any relevant document issued by the foreign jurisdiction’s competent authority, indicating the entity’s tax residency.
Avail the Expert Services of Top ESR Consultants in the UAE
Failure to provide adequate evidence to establish Exempted Licensee status will result in the entity being treated as a regular Licensee under the ESR Regulations, subject to the associated requirements, including the Economic Substance Test. Therefore, Licensees should seek the expert services of top ESR Consultants in the UAE to effectively determine their exemption status in compliance with the Economic Substance Regulations. Thus, contact us today and we shall be glad to assist you.