What are the ESR changes in 2021? All you need to know

What do you need to know before filing ESR?

Recently the resolution of ESR was changed by the UAE Cabinet of Ministers from the ESR resolution of 2019 and issued an updated regulation through Cabinet Resolution No. 57 of 2020. This new regulation supplies firms with 1 January 2019, as the start of their financial years. Additional guidance for the New ESR was subsequently provided by the UAE Ministry of Finance from Ministerial decision No.100 of 2020. This resolution replaced the previous 2019’s Decision No. 215 and included a relevant guide of the updated Activities attached as an appendix. The Regulations and guidance apply to all UAE jurisdictions, including financial free zones such as the DIFC.

Key points mentioned in the Updated ESR include:

• Branches of any UAE company do not need to file separate ESR notification- The new ESR regulation states that when a UAE company has a branch in UAE with a single parent company for all of them. It is not required for all the branches to file the ESR notification separately. All that you have to do is file a single notification that will mention all your relevant activities of your parent company based in UAE along with the activities of all your branches.
• Licensees’ definition changed- Licensees are required to comply with the New ESR, but its definition changed which now only applies to a corporate person, incorporated outside or inside of the UAE, or an unincorporated partnership where each partner much have a presence in the UAE and conduct a Relevant Activity.

A natural person, sole proprietor, trust, or foundation has been omitted from the list. The Licensees list also includes some exemptions such as investment funds, entities completely owned by residents of the UAE and which carry out their activities only in the UAE, Outside UAE tax residents’ persons, foreign parent companies branch where the income is subject to tax outside the UAE.

Most of the entities owned by the government of the UAE are no longer exempted unless they fall within any of the exempted categories in the updated ESR.

Any Licensee who wishes to be benefitted from the exemption must provide evidence for the same.

• UAE branches of foreign companies are given relaxation for the reporting requirements- For any foreign company whose branch is registered in the UAE does not fall under the new ESR. Provided the income earned by the branch company must be subject to tax in the overseas jurisdiction.
• The definition changed for the group and connected person- Group and connected person’s definition have been changed which will impact the assessment of the headquarters business, service centre business and distributions, as well as relevant activities of the IP Business with high risk.
• The charge of compliance and control has been given to the UAE Federal Tax Authority- The National Assessing Authority to oversee compliance and control of the New ESR has been given to the UAE Federal Tax Authority.
• ESR notification needs to be filed with the UAE Ministry of Finance by Licensees- The new ESR states that if your business qualifies as a Licensee, your notification must be filed with the UAE Ministry of Finance through an online portal, within six months from the end of the financial year.
• Increased penalties- The New ESR has been updated with an increased penalty which also includes the administrative penalties for non-compliance. Penalties are as follows:
• In case of failure in report submission of failure in meeting the requirements of the tests in the first year, a penalty of AED 50,000 has been imposed.
• In case of failure in report submission of failure in meeting the requirements of the tests in the second year, a penalty of AED 400,000 has been imposed.
• In case the Licensee provides inaccurate information to the relevant regulatory authority or Federal Tax Authority a penalty of AED 50,000 to be imposed.
• In case a Licensee fails to submit the notification, a penalty of AED 20,000 to be imposed.
• Changed definition of relevant activity- There have been changes in the definition of relevant activities including Holding Company Business and Distribution and Service Centre Business.
• Economic substance reporting- Licensees who must meet the economic substance test should submit their Report of Economic Substance to the Ministry of Finance within 12 months after the end of the financial year for the Licensee. The report must contain the following information:
• Type of Relevant Activity conducted
• Type and Amount of gross income incurred from the Relevant Activity
• Type and Amount of assets and expenses operating with respect to the Relevant Activity
• Location of the relevant activity of the business and, if applicable, property, plant, or equipment used for conducting the Relevant Activity.
• Number of full-time employees with qualifications and number of personnel who are responsible for carrying out the Relevant Activity
• Core Income-Generating Activity in respect of Relevant Activity being carried out by it
• Financial statements
• Declaration by the Licensee if the business satisfies the economic substance test.

The new ESR regulation requires the Licensee to undertake immediate action to achieve compliance. Therefore, it is a must for all Licensees to revisit their earlier classification of ESR to check them with the newly updated regulations and analyze their current situation to know whether they fall within the purview of the revised regulations and if so, they must prepare for resulting compliance requirements accordingly. 

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UAE: VAT refunds for business visitors; refund opportunities

The UAE tax authority updated its guidance for refunds of value added tax (VAT) for business visitors.

The updated VAT refund guide addresses specific circumstances when non-UAE resident businesses are entitled to claim a refund of VAT on expenses incurred in the UAE. 

Changes

The updated VAT refund guide reflects the following changes:

• A clarification about the effective date for foreign businesses to claim VAT refunds when a country is added to the list of countries having reciprocal agreements for VAT refunds for business visitors
• Amendments to the documentation requirements when submitting a VAT refund request (a certificate of incorporation is no longer required)
• A clarification that system-generated and scanned tax invoices will be accepted as original tax invoices and may be submitted to the tax authority by e-mail (hardcopies no longer required)
• The list of countries with reciprocal agreements for VAT refunds for business visitors (formerly contained in Appendix A) to be published separately

No change to deadline

The deadline to submit VAT refund requests—31 August 2021—has not been modified. 

Refund opportunities

To the extent that a business is registered for VAT in the UAE, the refund scheme will not be relevant. However, a business may need to have non-resident affiliated entities that incurred VAT in the UAE in 2020, and these rules may apply with regard to those entities. The new measures may present an opportunity to claim input VAT that otherwise would be a “sunk cost” for these entities. 

Source : KPMG

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Updated Real Estate VAT Guide

In a move that will be welcomed by both the real estate sector and VAT practitioners, the Federal Tax Authority (FTA) has published two items of note to the VAT treatment of real estate transactions:

• The VAT Real Estate Guide VATGRE1 has been updated to reflect the FTA’s views on a number of topics, including Musataha agreements, the exemption for bare land and the VAT status of Owner’s Associations.
• Public Clarification VATP018 clarifies the FTA’s position on the consequences arising from a change in permitted use since a building has been acquired.

VAT Guide: Real Estate VATGRE1 – update to guide

FTA VAT Real Estate Guide VATGRE1 covers a wide range of matters across the spectrum of the Real Estate Sector.

As with many VAT Guides, this document is updated from time to time to reflect latest FTA thinking and to expand its coverage to new issues that have come to attention. Helpfully, the FTA provides a summary of the latest updates and amendments in Section 15.

In summary, the updates relate to:

• The supply of accommodation in labour camps – clarification that input VAT incurred by employers related to accommodation that is not necessary for an employee to perform their role is not recoverable (see section 3.6).
• A discussion of what the FTA considers to be a “partially completed” building – clarification that temporary movable structures placed on bare land will not cause the land to be considered covered by buildings or civil engineering works and hence cease to be “bare land” for VAT purposes (see section 3.6).
• The development of leased bare land – clarification on the VAT treatment of the supply of leased land, where the land becomes partly or completely covered by buildings or civil engineering works, depending on the application of particular “date of supply” rules. (see section 5.6)
• Importantly, the updated guide now expresses the FTA’s views on the treatment of supplies of land under Musataha agreements, including whether that is a singular supply or an on-going periodic supply, which has particular relevance to such agreements entered into prior to commencement of VAT on 1 January 2018 (see section 5.6).
• VAT recovery of repair and maintenance costs – clarification on the use of the floor space special method of input VAT apportionment to be used for recovery of residual input VAT where the standard method of input VAT apportionment is not appropriate (see section 7.3).
• Management Entities – the section on Owners’ Associations is now updated to include Management Entities and, importantly, will settle some unnecessary confusion in the market that these entities are in fact required to register for VAT in many circumstances (see section 8).
• Outlining a new process for submission of New Residence Refund Requests – confirmation that all applications for refunds for New Residences be made through the FTA e-Services Portal (see section 13.4).

VAT Public Clarification VATP018 “Change in the permitted use of a building”

FTA Public Clarification VATP018 “Change in the permitted use of a building” was released on 27 April 2020. VATP018 clarifies the FTA’s position on the VAT liability of a subsequent supply of a building by a purchaser where there has been a change in permitted use since the building was acquired.

That is, does a subsequent supply mean that the VAT treatment of a prior sale needs to be revisited. In short, the FTA quite correctly concludes that it does not.

The sale of a building by a seller will be subject to VAT depending on the use of that building at the time of supply (exempt or zero rated for residential buildings and standard rate for non-residential buildings). Where the purchaser changes the permitted use of the building prior to making an onward supply by way of sale or lease of the building, the subsequent supply of that building will depend on the use of the building at the time of that subsequent supply (standard rate for non-residential and exempt or zero rate for residential).

Importantly, the FTA makes it clear that the subsequent supply is completely separate and distinct from the original purchase and its VAT liability is solely dependent on the use of that building when it is subsequently sold or leased.

The VAT liability for taxable persons of the initial sale and subsequent supply following change of permitted use is summarized below; the usual definitions in the UAE VAT legislation apply to residential and non-residential buildings:

Source : KPMG

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New Public Clarification on Extended Temporary Zero-rating of Certain Medical Equipment

UAE Publishes New Public Clarification on Extended Temporary Zero-rating of Certain Medical Equipment

The UAE Federal Tax Authority (FTA) has issued Public Clarification VATP025 to clarify the temporary zero-rating of certain medical equipment with effect from 1 September 2020, which replaces Public Clarification VATP023 on the matter.

The main points of the new public clarification are in line with prior public clarification, including that zero-rating is provided from 1 September 2020 for medical face masks, half filtered face masks, non-Medical “community” face masks made from textile, single-use gloves, and Chemical disinfectants and antiseptics intended for use on the human body. However, the key change is that zero-rating is now provided until 31 December 2021 in accordance with Cabinet Decision No. 15/3 O of 2021 (previously provided until 28 February 2021).

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