Strict adherence to ESR requirements necessary, experts say
Companies across the UAE need to be up to date and comply with the UAE’s economic substance regulations (ESR) unless they want to incur heavy fines for their failure to comply, experts have said.
In a recent webinar organised by the Dubai Chamber, in collaboration with Al Tamimi & Company, experts highlighted the latest developments and provided guidance with respect to the economic substance regime and compliance requirements. The webinar, titled ‘Key Aspects of Economic Substance Regulations’, noted that the UAE has issued the Economic Substance Regulations in April 2019 and followed them with an updated guidance on relevant activities by the Ministry of Finance to help businesses to demonstrate economic presence in the UAE.
The UAE adopted new economic substance regulations in Cabinet Resolution No. 31 of 2019. These regulations provide that a company engaged in one of a number of specified sectors must have sufficient economic substance in the territory to access the territory’s tax regime. The changes were in response to pressure from the EU on a number of territories, following recommendations from its EU Code of Conduct Group, and apply for financial years starting on or after January 1, 2019. The key activities identified by the European Commission Code of Conduct Group are: banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles, and holding companies that generate income from any of these key activities.
Shiraz Khan, head of Taxation at Al Tamimi & Company, said that tax is a key revenue generation for many countries that don’t have an abundance of natural resources. “These countries generally rely on taxes to fund their public expenditure.”
One of the biggest concerns during the 2008 downturn, he said, revolved around tax evasion. “Many international companies around the world, with the advent of globalisation, were essentially operating in multiple countries and moving money from high tax jurisdictions into low tax jurisdictions and therefore paying less tax as a result.”
The UAE Ministry of Finance (MoF) in August 2020 announced the details of the Cabinet Resolution No. (57) of 2020 concerning Economic Substance Regulations. The Resolution was issued in consultation with the Organisation for Economic Cooperation and Development (OECD) and the European Union Code of Conduct Group, in order to direct companies that engage in one or more relevant activities. The resolution amended and repealed the Cabinet of Ministers Resolution No. (31) of 2019 concerning Economic Substance. Under the resolution, the UAE Federal Tax Authority (FTA) was appointed as the National Assessing Authority for the purposes of the UAE Economic Substance Regulations.
According to the resolution, the definition of a Licensee was amended to be limited to juridical persons and unincorporated partnerships that are registered (whether by way of commercial/trade license or other form of permit) to carry out a Relevant Activity. Natural persons, sole proprietorships and other business forms that are not juridical entities are no longer within the scope of the UAE economic substance regulations.
Noff Al-Khafaji, senior associate, Corporate Structuring at Al Tamimi & Company, noted that the UAE Ministry of Finance, in May 2020, issued a Covid-19 advisory extending the notification filing deadline and consideration of the impact of the pandemic on businesses. In January 2021, the MoF announced that the December 31, 2020 filing deadline for ESR notification and report (if applicable) was extended to January 31, 2020. Failure to provide notification and any relevant information or documentation will result in a Dh20,000 fine, she said. Also, providing inaccurate information will result in a Dh50,000 fine. Failure to submit an ES report can result in a fine of Dh50,000 in the first year, and a fine of Dh400,000 in the second consecutive year of failure.
Owner of multiple ‘sole firms’ needs just one tax registration
The UAE’s Federal Tax Authority (FTA) clarified on Monday that an individual (natural person) owning multiple sole companies is required to obtain only one tax registration for all of them, and not for each one separately.
The FTA said in a statement that a sole establishment (sole proprietorship) is a legal form of business which is 100 per cent owned by a natural person, and it does not have a legal personality independent of its owner, as the sole business and its owner are considered to be the same person.
This announcement was issued in a new public clarification regarding the VAT registration of sole establishments, which recorded a 1.3 per cent surge to 304,948 at the end of January month-on-month, reflecting the robust activity of the sector, which recently attracted many investors from both inside the country and abroad.
The National Economic Register’s recent figures show that relevant authorities issued over 4,000 new licences for sole establishment around the country in January 2021.
According to statistics, sole proprietorship account for nearly 41 per cent of total commercial licences of 740,717 at the end of January.
Abu Dhabi, Dubai and Sharjah account for 78.6 per cent of the total sole establishments operating in the country.
The FTA clarification on tax registration seeks to educate people with the aspects of the tax rule which need simplified explanations, “enabling them to apply the tax principles accurately and efficiently,” the tax authority said.
The FTA clarified that the sole proprietorship rule does not apply to a One-Person Company LLC or other similar legal entities, which are seen as “distinct and separate legal persons” from their owners (unless the applicable legislation treats such entity and the natural person as the same person). For the avoidance of doubt, it should be noted that a legal person (e.g. a company) cannot own a sole establishment.
In certain cases, tax registrations by taxpayers are reviewed with regards to sole establishments and such persons will be informed of the corrective measures to be taken, if needed, the FTA explained.
The tax authority noted that the taxable supplies made by a natural person, in addition to his sole establishment(s), must be considered collectively in order to determine whether the person exceeded the mandatory VAT registration threshold of Dh375,000.
The FTA said the registrant must inform the FTA of any undeclared output tax by submitting a voluntary disclosure in accordance with Federal Law No. 7 of 2017 on Tax Procedures, for example where the registrant disregarded any of his sole establishments or taxable supplies made in his personal capacity for VAT purposes. “This includes instances where a person failed to register for VAT on the basis that the mandatory VAT registration threshold was not exceeded on a stand-alone basis by that natural person or his sole establishment(s).”
A natural person is also required to notify the FTA if it failed to register for VAT and take the necessary corrective action to account for any outstanding dues.
SRTI Park, Emirates Development Bank collaborate to support SMEs
The Sharjah Research Technology and Innovation Park (SRTI Park) has signed a Memorandum of Understanding (MoU) with Emirates Development Bank to support innovative small and medium-size enterprises (SMEs) in the UAE.
The MoU is to represent the Mohammed Bin Rashid Innovation Fund (MBRIF), the operator of MBRIF programmes, to enhance financing of SMEs operating in various fields of technological solutions, Artificial Intelligence, and innovation.
The MoU was signed by Hussain Al Mahmoudi, CEO of SRTI Park, and Faisal Al Bastaki, CEO of Emirates Development Bank, in the presence of MBRIF Director Shaker Farid Zainal and a number of senior officials from both sides.
Under the agreement, the two parties will work to promote the growth of various technology sectors operating inside the SRTI Park, with special focus on water technology, environmental technology, renewable energy, transportation technology, information technology, industrial design and architecture, and other enterprises that promote innovation.
The fund supports companies that offer unique and innovative ideas at national and international levels. The aim of the agreement is to activate the fund’s role in supporting the UAE’s transition to a knowledge-based economy, thus achieving prosperity and sustainability for the country.
SRTI Park CEO Hussain Al Mahmoudi, said: “We are happy with this cooperation with Emirates Development Bank, which will have a clear impact in encouraging small and innovative investors to motivate and translate their creative ideas into successful ventures. The MoU will facilitate funding to finance their projects and help turn their ideas from concept to reality. We are also proud to continue with our mission to intensify efforts and make SRTI Park an important hub of regional and international development for future technologies. Our role is to link the efforts of the private sector, governmental bodies, and academic institutions to support scientific, applied and technological research to carry out investment activities and realise the UAE’s vision of a knowledge-based economy.”
Fatima Alnaqbi, chief innovation officer, MBRIF Representative of the Ministry of Finance, said: “The UAE is a nation built on innovation and entrepreneurship. Our government has built a strong hub for entrepreneurs by creating a start-up ecosystem that attracts innovative individuals from around the world, as well as nurturing homegrown entrepreneurs and businesses. This supportive environment has enabled the UAE rise within the global tech start-up ecosystem, and have set the UAE on a unique path of innovation and exploration, powered by human potential.”
Commenting on the strategic partnership, Faisal Al Bastaki, CEO of Emirates Development Bank, said: “We are proud to partner with SRTI Park to support innovative, technology-powered companies in the UAE. SMEs are at the core of the UAE’s economic growth and development, and through our collaboration, we aim to further contribute to the country’s innovation ecosystem, which is critical to the success of the SME sector.”
India Union Budget 2021: Key tax reforms
The government has left direct taxes unchanged, but took steps in direct tax incentives to ease compliance for taxpayers.
Senior citizens above 75 years of age with only pension and interest incomes have been exempted from filing tax returns, Finance Minister Nirmala Sitharaman announced on Monday.
While tabling the Union budget 2021-22 in Parliament, the minister said that the number of income tax return filers has increased to 6.48 crores now from 3.48 crores in 2014.
The government has left direct taxes unchanged, but took steps in direct tax incentives to ease compliance for taxpayers.
“We shall reduce the compliance burden on our senior citizens who are 75 years of age and above. For senior citizens who have pensions and interest income, I propose exemption from filing their income tax returns. The paying bank will deduct the necessary tax from their income,” she said.
Here are the other key tax proposals
* Exemption from filing income tax returns for senior citizens (75 years and above) who only have pension and interest income. The paying bank will deduct the necessary tax on their income.
* Reducing time limit for reopening of income tax assessment.
* Constitution of a dispute resolution committee for small tax payers
* Income tax appellate tribunal to be made faceless
* Increase in limit for tax audit for persons who carry out 95% of their transactions digitally
* Dividend payment to REIT/InvIT (real estate investment trusts and infrastructure investment trusts) to be exempted from TDS
* Pre-filling of returns will also cover capital gains from listed securities, dividend income, etc
* Eligibility for claiming tax holiday for start ups proposed to be extended by one more year
* Additional deduction of Rs1.5 lakh shall be available for loans taken up till March 31, 2022 for purchase of affordable house